Should you get a property development loan for your new build in 2023?

Q4 2022 and into 2023 has been turbulent for the property market… to say the least. We continue to see high levels of inflation and the Bank of England has consistently been raising interest rates, much to the dismay of those who are coming to renew their mortgages. As we can see, data from the ONS shows average UK mortgage rates have risen sharply in the past year:

But what does this mean for development finance rates? Although different from mortgages from high street lenders, nothing exists in a vacuum and the volatile property market can certainly impact your decision to undertake a development project in 2023 and beyond. In this blog post, we’re going to explore whether new-build developer loans are still a viable option in the current climate.

Has the Mortgage Crisis Affected Property Development Finance Rates?

The short answer is not really. It appears as though property development finance rates are largely untouched by the wider issues in the commercial mortgage market, and new build developer loans are still popular. Debt advisory specialists Sirius Property Finance, speaking to Development Finance Today, have undertaken an analysis that suggests the interest rate for such products has only increased 0.1% since Q1 2023. The average interest rate sat at 12.2% in Q2 2023. At the same time, the average set-up fee of 1.5% hasn’t changed, and neither has the average exit fee of 1.1%.

However, it’s not all good news. The analysis shows that despite seeming to weather the storm of the worsening UK economic climate, lenders appear to be operating cautiously. In many cases, lenders have decreased the maximum loan amount they’ll offer, by an average of £330k.

As a significant provider of funding for property development, such loans have a direct impact on the costs of house building and property development. As Kimberley Gates, head of corporate partnerships at Sirius Property Finance, puts it:

“The cost of borrowing has exploded in recent months so it’s good to see that despite two further increases to the base rate, the cost of financing a development has seen only the most marginal increase since the first quarter of this year.

“While the current domestic news cycle is taken up by the cost of living crisis, it’s important to remember that we remain in a time of housing crisis too.

“It’s vital that ongoing housing development keeps moving forward during this difficult time in order to sustain the ongoing demand for homeownership.”

Changing Market Conditions

The turbulent conditions seem to be making their presence known in other areas too. The latest market sentiment survey undertaken by Avamore Capital has identified that developers are experiencing longer sales periods. Consequently, the average bridging loan term has increased to around 12 months.

The survey also highlighted factors that have combined and led to a slowdown in the market for building development loans. These include increases in development costs, material delays, difficult circumstances around planning permission, increased interest rates, and reduced property valuations.

However, as much as the property development market has been hit in the last 12 months or so, there are opportunities waiting to be found. If inflation does continue to come down, which would lead to a drop in the base rate, smart developers could be in a prime position to obtain cheap sites, either from an industry-wide fall in house prices or as a result of more properties being in receivership.

Changing Land Prices Present Opportunities

It’s also worth noting that four of the UK’s largest housebuilders, Barratt Developments, Persimmon, Taylor Wimpey and Vistry, have all confirmed they are becoming more selective with their land investment, or are outright reducing it. This will certainly have an effect on overall land prices.

Research by Savills found that “UK greenfield and urban land values fell by 2.2% and 1.6%, respectively in Q4 2022, taking annual growth to 2% and 2.7%” This would make it the largest quarterly fall in land values since Q2 2009. Into 2023, they add:

“Land values continue to face downward pressure with rising build costs, falling house prices and slower sales rates in the new build market. Build costs increased by 8.6% over the last year and are forecast to increase by 17% over the next five years to Q1 2028.”

However, this could be a blessing in disguise for smaller developers. Those who are willing to take the plunge and acquire cheaper land (albeit with the risk of an upcoming recession) might find themselves in a great position in the future. As Guy Murray, Head of Development Finance at West One Loans noted in Development Finance Today:

“Housing market slumps don’t last forever. After all, we are an island nation with a limited amount of development space. So in the long term, those conditions provide a ballast for property prices…If you’re a smaller developer, now may be the time to strike, while the iron is hot.”

A Green Future?

It also appears that the evolution of housing could force developers’ hands. For example, the introduction of EPC benchmarks could mandate developers to adopt much greener practices and could propel the refurbishment market in the months and years ahead.

Whether you should get a development finance loan in 2023 is really a question of your own circumstances and finances. However, we are confident in saying that for those who are in a position to commit to a development project, specialist development finance remains a viable option.

For more information about our new build developer loans, as well as other products, don’t hesitate to get in contact with us, we’re always on hand to help!