Materials

Lenders 'unlikely' to increase their leverage over rising construction costs



The sharp fall in the value of the pound since Brexit is continuing to hit developers as the price of importing building materials rises.

The Federation of Master Builders recently found that 70% of UK builders had reported an increase in material prices due to the decline in the value of sterling.

SME builders reported that the cost of Spanish slate and timber had risen by 22% and 20% respectively. 

Rico Wojtulewicz, policy adviser for the National Federation of Builders (NFB), said the fluctuating availability and cost of materials had increased borrowing for many SMEs.

“Consequently, some developers have needed to renegotiate projects and affordable housing contributions, which can cause significant delays. 

“Others are left with no choice but to absorb the cost, alter specifications or pass the increased expenditure on to the client or homebuyer.”
 


The rise in building costs has led to delays

Sam Howard, COO of Regentsmead, found that the twin forces of imported building materials and the shortage of labour was driving costs up and proving to be a problem for many SME builders.

“Only recently a developer told me that a bricklayer’s day rate had gone up dramatically over a relatively short period of time. 

“The sharp fall in the value of the pound since Brexit continues to hit developers, raising the price of imported materials. 

“The full force of the cost increases can come midway through the build and dramatically throw estimated build costs out of line, causing developers to have to cover the costs themselves or come back to the lender to borrow more.”

“It is unlikely that we will see lenders increase their leverage”

Michael Dean, principal at Avamore Capital, looked at what impact this could have on development finance lending.

“It’s unlikely that we will see lenders increase their leverage (LTV/LTC) to compensate for the increased construction costs. 

“If anything, development lenders have been dialling back their risk appetites since H1 2016. 

“With development finance normally requiring 100% of build costs being set aside on development facilities, it will mean that there will be proportionally less leverage available to developers when purchasing development sites.”
 


There will be a shift towards UK products

James Bloom, managing director of development finance at Masthaven, felt that as a result of rising import costs, we would see an upward trend in certain building materials.

“This could result in a downward pressure on site values, given we are seeing low capital inflation of the end product. 

“Also, there will be a lean towards more UK products, which will now seem relatively cheaper and so this could result in a boost for [the] UK industry.”

Sam, meanwhile, believed that there could be a change in the way homes are built. 

“We can do little in the short term to reduce material costs or reduce skills shortage. 

“One answer is for the government to look at incentivising new types of housing that can be built quickly and cheaply using modular or pre-manufactured modules.”
 


The government has been urged to back developers

Rico said that some NFB members had chosen to reduce costs and delays by manufacturing materials in-house, but this had required significant investment.

The NFB now wants the government to recognise the value of these home-grown industries and support them to become national suppliers and export ready.

“In the short term, government must continue improving access to finance and delivering their commitment to simpler planning,” said Rico.

“Materials could then be bought in bulk as projects could be planned in advance and more importantly, simpler planning would reduce costs and delays when material alterations require further planning department approval.”


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