Developing with Inflation
Like the rest of the economy developers are having to work with inflation, which is a novelty for some, certainly at the current levels.
The BCIS 3Q 2022 Report suggests house build prices rose by 15.5% in the year from 3Q 2021. The increases were a mix of material and subcontractor costs with the latter being the most significant. Expectations are that prices will increase again by 2.5% over the next twelve months.
Land Registry as of August 2022 indicated that the average house prices had increased by 13.6% across the UK in the previous 12 months, the figure for the southwest pretty much on the national average.
Developers have enjoyed the benefits of house price inflation for many years which has more than covered higher build costs and has become something of a given in their assumptions leading to very competitive bidding for residential development land.
The danger is that some developers are including house price inflation into their financial appraisals justifying inflated land value offers. The August RICS UK Residential Survey points to a downward trend in market activity with enquiries, sales, and new instructions all down. Enquiries are 30% down and sales 22% down. Expectations are that prices will remain unchanged over the next 12 months.
With higher land values and without future inflation in house prices, profit margins will be squeezed. Slower house sales creating longer programmes than they have become accustomed to could stretch their cashflow which combined with higher costs of borrowing could create problems for some.
Inflation creates uncertainty which creates risk. Perhaps a slower market could remove some of the recent overheating and with it, inflation. It is a time for a little extra thought. Take care.
For expert advice on development, please contact our Development team.
