Rising inflation, supply chain disruption and labour shortages have all affected many industries across the board since Brexit and the pandemic, but the construction industry, in particular, sees all these factors and more impacting. Government energy policy for decarbonising homes and the net-zero target by 2050, as well as the target for new homes all, place a spotlight on an industry that faces varying pressures from so many different directions.
But how are these pressures affecting the smaller scale builders and property developers? ProActivity spoke to Paul Bithrey, Director at Foxley Kingham about the current outlook for the construction industry and what it’s like for his own clients at the moment on the ground.
“We work with smaller-scale developers who might build one to a dozen houses. They are covered by the same planning rules as the large developers but they operate in a different market, which means they have to keep up with all the same changes in planning policy, constantly changing, while being subject to the increased costs of construction.”
Increasing pressure to build houses to carbon-neutral standards has an impact on the materials that can be used. But Paul says it’s not just the materials where the increases come from.
“The cost of construction is generally more expensive. Yes, material costs are certainly higher and where there are requirements for specialist carbon-neutral materials, such as solar panel roof tiles, these don’t come cheap. But it’s the essential materials too that are more expensive. The cost of steel has tripled and timber prices are soaring. This all has an impact on top of the increased cost of labour. Labour is now a scarce commodity.”
There are additional tax costs for larger residential property developers to also contend with as of 1 April – the residential property developers tax (RPDT) will be levied at a rate of 4% on profits over £25m from residential units built for sale. The new tax does also include a mechanism of loss relief, which acknowledges that many developments make losses for several years before profits. If the legislation from April operates effectively, this should mean the profits subject to RPDT are based on the profit for the overall development, not just the profit made in the year of sale.
With the increased costs of materials and labour, it’s not hard to see why house prices are at an all-time high. Have developers particularly struggled then if higher house prices are compensating them for increased building costs?
“The stamp duty holiday made everyone clammer to move, to buy and sell homes. And the increased costs were simply put onto the price of the property, that is true. But the stamp duty holiday has now gone.”
With house prices still rising, along with inflation, Paul explains the increasing disparity between the cost of buying a house and the wages required for lending.
“At some point, there is going to have to be a correction in the market. We can see that house prices are going through the roof and wages haven’t; in fact, with inflation, wages are actually going down. House prices can only ever be a multiple of wages due to lending.”
So where does this leave demand for new homes and how do his clients deal with these pressures?
“More astute developers are aware of the economic overview and will change what they build to stay within costs and planning regulations. Some have tried to get into offsite building, which in theory is cheaper, but practically is hard to achieve. The demand continues to exist for cheaper housing, but it cannot be met. The Government target has consistently been 300,000 new homes a year but has never surpassed 140,000 a year. If we could get better at offsite building and achieve what they have in Sweden and other parts of Europe, with the manufacture of houses offsite, this could potentially change the face of construction.”
(Offsite construction refers to structures or components built at a different location than the location of use.)
Innovation continues to be the necessary attribute of a surviving business amidst rising material costs, labour challenges and market pressures?
“Definitely,” says Paul. “All of our builders are pretty much doing ok. Where they can’t get materials, because of the knock-on effects of supply chains, they source from elsewhere. Materials shortages are now commonplace, whether it’s a shortage of bricks or a year’s lead time for earthmoving machines.”
But other difficulties particularly apply to smaller construction firms, Paul goes on to say.
“For major construction firms, it’s mostly about keeping material costs down. But smaller developers also face higher lending costs. High-street lenders are far more reluctant to lend against the construction industry now so developers go to second-tier lenders who are more expensive. Planning can also be more difficult since council planning departments are so behind after COVID and subject to Government proposals for house building. They would rather pass an application for a hundred houses than three. My clients have seen delays in planning applications going to the committee for up to six months. If you’ve invested in your planning costs and sunk working capital, all hanging on a planning application, that’s not an easy situation to be in.”
It seems as if Government policy with regards to targets for new homes and standards for carbon-neutral homes are out of touch with what’s actually going on, on the ground, and what’s achievable.
Paul agrees, but the outlook is positive for most of his clients. “Yes, Government policy is completely out of touch with what’s achievable in reality. But the good news is our clients are entrepreneurs. The experienced developers are winning. But it is a difficult time and for those perhaps new to property development it will be a different story.”
Being financially savvy is as important as ever at the moment, get in touch with your Foxley Kingham accountant to discuss ways of easing current pressures.