Post-pandemic property market slump presents opportunities for smaller developers
‘Build, build, build’ is the prime minister’s message as we lift from lockdown and focus on getting the economy moving. Infrastructure and construction are the key to getting the country on track and preventing a worse recession than the country is already expecting. However, the focus of the government has been on larger construction companies and projects, with little emphasis on the estimated 280,000 SME developers (20% of all UK SMEs) who supply a good percentage of affordable homes, with smaller development projects.
Small developers, during the lockdown, were able to access funding from the government as their projects suddenly came to a grinding halt. Medium sized businesses, however, were particularly hard hit, with little or no financial support. So now the pace must be picked up to ensure that current projects remain on track and on budget and new projects can be launched at pace.
For SME developers, the upcoming drop in land prices could offer a lifeline for their next project. Lower land prices, a significant proportion of the cost of a development, will mean a smaller initial investment for the developer. That – combined with increasing unemployment due to the pandemic will make skilled workers and labour more easily accessible, meaning work can progress quickly and efficiently. But, what about financing?
Peter Owen, head of development finance at Saffron Building Society explains: “It can seem a little daunting for smaller developers to begin a housing development at this time, but it could actually be the perfect opportunity to take advantage of high unemployment and the recession following this year’s unprecedented events. As a development finance specialist, I work with SME developers daily, often monitoring their process and advising them where I can. I have seen the problems this lockdown has caused for smaller developers. However, there is light at the end of the tunnel and getting to work on a project now, could really reap rewards for them moving forward. At Saffron, we offer finance for developers, designed to suit the requirements of the build, and offer guidance and advice along the way. If we are approached with potential projects that can be kickstarted immediately, we are more than happy to offer development financing, even during this unusual time.”
Many will wonder how financing a development now, and beginning a project during a country and worldwide recession, can benefit them as an SME developer? Affordable housing – targeting first-time buyers – will provide access to a very lucrative market, so planning the right type of project will be key to success. With land prices and unemployment, as discussed, offering a potential early saving, in the time the development takes to complete it would be expected the market would have stabilised and offer a glimmer of hope for property prices. A recent survey of mortgage brokers, found that a whopping 70% of them believed the market would return to pre-pandemic levels in nine months.
If the market does not recover by the completion of the project, SMEs could be faced with having to accept a much smaller profit margin – maybe little or no profit – on the sales of the homes. Peter Owen explains how others have dealt with this awful situation: “If the property market has not recovered at the end of a project, although disheartening, it is not the end of the world. My clients, who have fallen foul of a slump in the property market, have used bridging loans to finance their next project – allowing 12-24 months of leeway whilst the market recovers. Bridging allows the developer to borrow against their development whilst waiting to sell – this funding is then used to finance the next project. This allows the SME to continue with a flow of builds with limited disruption. When the markets return, it’s sell…sell…sell!”