Kick-starting your property development business in an uncertain market

It’s been a rollercoaster year for UK property developers. There was the shutdown in spring that saw around a third (29%) of project sites suspended¹, followed by a post-lockdown boom in September, when pent up buyer demand drove house prices up by 7.3% - the biggest annual increase since June 2016².

In response, property development companies are starting to adjust to a new normal. Sites are re-opening, overall construction capacity is now at around 65%, and most observers now predict house-price growth for 2020 of around 4%³.

However, property development companies seeking to kick-start their businesses in 2021 will need to strike a careful balance between opportunity and risk. On the one hand, the market opportunity is clear, with demand for property remaining strong and the UK government maintaining a target of 300,000 new homes per year. On the other, challenges and uncertainties remain – from the continued need for social distancing on site to ongoing economic turbulence⁴ and changing buyer behaviours in the property market.

House price instability

Real estate prices may have risen overall in 2020, but projections for 2021 are far more cautious – particularly after the first quarter when the current Stamp Duty holiday is due to end⁵.

Many observers believe that the property market will continue to growth strongly in the early months of 2021⁶, but the picture from April onwards is less certain. Savills, for instance, is predicting 0% growth for 2021⁷ overall, while a recent RICS UK Residential Survey predicted that prices will fall over the next 12 months⁸.

Clearly, UK property development companies will need to factor this uncertainty around property prices into project planning, as well as discussions with investors around access to property development finance.

Changing buyer behavior 

Meanwhile, living through a pandemic, along with the associated lockdowns and work from home advice, have significantly altered property buyers’ priorities and behaviours.

In particular, the experience of city living during lockdown has precipitated a ‘Race for Space’, with home buyers looking away from city apartments and instead seeking properties in rural and coastal locations. Indeed, according to Rightmove, searches for homes in small towns and villages have doubled in recent months⁹.

Similarly, it seems homebuyers also now put a premium on properties with more private space. Accordingly, 68% of UK property professionals believe that properties with fewer communal spaces will become extremely desirable¹⁰, while more than 80% of surveyors and estate agents predict that the UK property market is likely to experience a spike in demand for homes with their own gardens or balconies over the next two years¹¹.

Whether these trends continue in the longer term remains to be seem, but it seems clear that, for now at least, property development companies will need to bear these shifting demands in mind.

Race to the regions

On a similar note, for the time being at least, London may not be the sweet spot for property developers. In fact, on a five-year basis, the north-west is projected to deliver the strongest house price growth - reaching around 27% - closely followed by Scotland (25.4%), Yorkshire and the Humber (24.1%) and the East Midlands (22.6%)¹².

Meanwhile, Wales (22.3%), the West Midlands (21.7%) and the north-east (21.7%) are all also forecast to see higher than average growth¹³.

A boom for rental property investment?

Over the longer term, property developers will also need to adapt to a trend towards private renting.

Research from the Resolution Foundation revealed that around 40% of millennials are still living in private rental property by the age of 30, and a third of the wider population is expected to be renting well into retirement. Overall, it is thought that renters will outnumber homeowners by 2039¹⁴.

In the short term, low interest rates and the availability of competitive buy-to-let mortgages¹⁵ suggest that investors may increasingly focus on property for the rental market. In turn, property developers will need to adapt to the demands of buy-to-let investors, with properties designed to deliver attractive yields -the balance between purchase price and rental income, and a critical measure for let property investors¹⁶.

Managing property development risks

Clearly, rising property prices and strong demand give cause for optimism amongst property developers, but that must be tempered by the significant uncertainties that remain.

In part, that means property developers must clearly understand the balance of risk and reward in every development opportunity. But it also means taking even more care to protect against the known risks that can affect every project – from delays and increased costs, to defects and oversights.

With that in mind it has never been more important to ensure you have the right property developers insurance in place – coupled with expert risk management, comprehensive, affordable cover could make all the difference by taking risks off the table as you seek to kick-start your property development company in uncertain times.

^Sources: 

1. ^{https://www.savills.co.uk/research_articles/229130/301708-0/coronavirus-and-residential-development---june-2020}
2. ^{https://www.bbc.co.uk/news/business-54454990}
3. ^{https://www.buyassociation.co.uk/2020/10/05/uk-housing-market-predictions-what-to-expect-from-the-12-months-ahead/}
4. ^{https://www.buyassociation.co.uk/2020/10/05/uk-housing-market-predictions-what-to-expect-from-the-12-months-ahead/}
5. ^{https://www.express.co.uk/life-style/property/1364065/uk-property-market-house-prices-demand-peaks-october-2020}
6. ^{https://sevencapital.com/investor-resources/uk-property-market-forecast-2021/}
7. ^{https://www.buyassociation.co.uk/2020/10/05/uk-housing-market-predictions-what-to-expect-from-the-12-months-ahead/}
8. ^{https://www.bbc.co.uk/news/business-54454990}
9. ^{https://www.bbc.co.uk/news/business-54454990}
10. ^{https://www.mortgageintroducer.com/post-pandemic-property-market-predictions/}
11. ^{https://www.mortgageintroducer.com/post-pandemic-property-market-predictions/}
12. ^{https://www.buyassociation.co.uk/2020/10/05/uk-housing-market-predictions-what-to-expect-from-the-12-months-ahead/}
13. ^{https://www.buyassociation.co.uk/2020/10/05/uk-housing-market-predictions-what-to-expect-from-the-12-months-ahead/}
14. ^{https://www.propertyinvestortoday.co.uk/breaking-news/2020/9/10-reasons-to-invest-in-uk-property-now-despite-the-recession}
15. ^{https://www.propertyinvestortoday.co.uk/breaking-news/2020/9/10-reasons-to-invest-in-uk-property-now-despite-the-recession}
16. ^{https://www.propertyinvestmentsuk.co.uk/how-to-work-out-rental-yield/}