Budget uncertainty puts development projects on hold

A third (32%) of property developers have seen multiple projects put on hold over the past 12 months as a direct result of build cost volatility due to high labour, materials and fuel prices, revealed the latest research from Atelier and Paragon Building Consultancy.

Of the over 100 developers and surveyors questioned for this study, 89% said that labour costs are still rising.

A quarter (25%) of those polled said wage bills rose by at least 15% in the past 12 months, while one in 40 saw wages spike by over 20% in a year.

In addition, half of respondents said that building materials costs spiralled by 15% or more over the past year — however, 19% reported that material prices have now stabilised or even started to fall.

Respondents’ long-term concerns were dominated by the shortage of skilled construction workers and the long wait times for building materials.

In addition, 93% of respondents said they are increasingly worried about the spike in fuel prices unleashed by the war in Ukraine.

These concerns are weighing heavily on developers’ cost planning — 31% of those polled are currently allowing a contingency of 10% or more for a standard residential development worth £3m, double the 5% margin typically budgeted for.

In an effort to insulate themselves from cost escalation, 68% of developers are now more likely to ask tendering contractors to bid for work on a fixed-price basis than they were before the pandemic. 

However, the survey found that few contractors are willing to oblige, as three quarters (74%) are no more likely to bid for a fixed-price contract than they were two years ago.

Rebecca Nutt, director of portfolio management at Atelier, said: “Residential real estate is buoyant, but the waves of inflation keep coming, and unwary developers risk being swept onto the rocks of surging build costs and project delays.

“To be successful in today’s market, you don’t just need a watertight development plan, but also the courage, skill and contacts to change it at short notice without losing momentum.

“At Atelier, we’re acutely aware of the cost pressures our customers face, and that’s why we provide each one with access to our team of in-house construction and finance professionals, who can quickly assist if unforeseen events force the project to change tack.

“We’ve always seen our role to be about more than just providing finance to borrowers; Atelier is always a partner, not just a lender, to the developers we work with, from the planning phase right through to project completion.”

Robert Kendall, director at Paragon Building Consultancy, added: “The supply chain stepped up well to the surge in developer demand as the pandemic eased, but the spike in fuel and raw material prices triggered by the war in Ukraine means that cost pressures are once again likely to eat into developers’ bottom lines this year.

“Those pressures are being felt most keenly by smaller developers, who have less purchasing power and limited leverage when it comes to persuading newly emboldened contractors to share the cost risk, and work on a fixed-price basis.

“With the Bank of England widely expected to increase interest rates further in 2022, the fixed rate finance and expert support offered by Atelier provides vital certainty for developers in an exciting, but testing market.”

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