Keith Thomas FRTPI, FRICS is the Director of PER Consulting.
Whilst the UK narrowly avoided entering a formal recession at the end of 2022, there is no denying the widespread impact of the cost-of-living crisis and the ripple effects on consumer and business confidence is creating uncertainty in the development industry. Financial markets went into panic mode after the Kwatang and Truss mini-budget last Autumn and the Bank of England continues to address soar away inflation through further Base-Rate rises which now stands at 4% - the highest it’s been in over a decade.
These are not just high-level news items for the readers of the Financial Times but have a direct impact on each one of us as they translate into increased mortgage costs and the wider availability of loan finance – for consumers, business and the development market. As Base-Rates rise, the cost (and risk) of providing development finance also rise so that lenders can also cover the cost to them of raising the funds in the first place.
Furthermore, as the cost of mortgage repayments rise, the range of loans on offer reduce and there remains the risk of further increases in the future, then purchase decisions may be deferred or put off all together – resulting in a slow-down in the housing market. The longer it takes a developer to sell their property the more holding costs they have and greater exposure to debt and resulting interest payments. Of course, these are typical developer risks but in an uncertain market far more difficult to predict and manage within contingency allowances.
All the major housebuilders are anticipating a contraction in market conditions and therefore reining in new development projects and considering potential job cuts. Some commentators are expecting a 10% reduction in house-prices nationally although it is also difficult to predict a generalised impact like this as there will continue to be other market pressures in some high demand locations. Where sales values are uncertain, developers will need to manage their financial agreements carefully where they may be in danger of breaching their loan to value ratio. Lenders will also automatically discount the developer estimate of Gross Development Value to protect their risk and exposure should conditions worsen.
Likewise in the commercial sector, some of the big agency firms are already preparing for redundancies and realignment of staff in anticipation of a global slow-down in property demand and brokerage services. The aftermath of the pandemic has also created a different picture of commercial property demand with continued retraction from retail space with a phenomenal rise in demand for logistics space with growth in on-line retailing and more flexible solutions being required to the traditional long-term office market.
So how do you address market uncertainty when preparing an initial development viability appraisal?
In truth, it should be no different to any other market circumstance; albeit recognising your evidence may be subject to greater scrutiny to establish confidence in your assumptions. The weight you give to available evidence and how you consider it best represents the scheme you are appraising is even more important.
The RICS recommend a “hierarchy of comparable evidence” to justify the relevance of transactional data and how it applies to the scheme you are appraising. This approach also allows you as a planner to potentially challenge the evidence presented in terms of location/proximity to the new development to reflect local market variations and the timing relevance of the transaction – especially in uncertain times.
You may also undertake more intense sensitivity appraisals given there may be a wider range of plausible scenarios to be tested. Care will also be needed on the nature of your advice and conclusions drawn from the appraisal during uncertain times and potential for re-valuation drawing on more recent market evidence to better inform your assumptions and conclusions.
The links between local planning and development decisions today and the wider national and global economy become all too apparent.
Discover more on Development Viability at the RTPI's online CPD masterclasses: “Introduction to Development Viability & Finance” or browse complimentary topics in the CPD Masterclass Calendar.
