Developers: challenges and opportunities in the year ahead

11 June 2018

There have been seismic shocks to the real estate landscape in the recent past. The collapse of Carillion left the market hurting, the Article 50 resolution brought uncertainty to the sector and the gender pay gap reporting highlighted discrepancies the industry is working hard to fix.

However, the real estate sector remains buoyant and nearly two thirds of respondents to our real estate survey were confident about the year ahead. The best developers see challenges as opportunities; the collapse of Carillion did not mean building work stopped across every site, but rather there was potential business for those firms quick and nimble enough to seek it. With that in mind Smith & Williamson has highlighted the three core concerns in the short, medium and long-term that developers in the real estate sector have for the year ahead, while also illustrating the possible opportunities that may be hiding underneath the surface:

  • Planning in the UK
  • The flow of capital
  • How to build while looking after the environment

 

Planning: the age old problem but a solution in sight?

Planning, and the complications around actually getting a building built, has long been a major problem for the real estate industry in the UK. 85% of respondents in our real estate survey cited the planning permission process as the key reason why building targets were not being met.

However, a five-year plan was announced in the Autumn Budget 2017, which is beginning to be rolled out across the country. The plan proposed packages to help housebuilders of all sizes but, perhaps crucially, it proposed the introduction of a central planning register. This register is still passing through review but has the potential to give central oversight to one of the core problems affecting every developer.

Another change to the planning system, alongside the review process being undertaken, was a simple increase of planning fees. This increase should limit the number of planning permissions filed, increase revenue for badly underfunded local departments and therefore help streamline big property developments.

The Home Building Fund will assist those at the smaller end of the market while Homes England should help development across the sector. This is a five-year programme, offering the certainty that businesses crave. The developers best-placed to take advantage of these changes will begin to flourish.

World cash flow: follow the money

There have been a number of changes to the taxation of property in recent years, designed to cool the prime residential property market and limit the amount of hidden overseas investment coming in to the UK market. There are indications that within the London market that is having an impact.

However, there are signs to suggest this has just re-directed the cashflow: Property Week has highlighted how it is no longer is it just oligarchs looking for second or third (or fourth) homes, but rather educated investors looking for ways to have their investment work for them such as the recent purchase of City Edge student accommodation in Birmingham in March 2018.

London remains the prime location for a lot of overseas investment as there is normally one investor willing to pay the asking price. However, to achieve greater return a lot of investment has flown out to the regions. For example, Chinese investment has vastly increased in to the Birmingham and Midlands market. This increased variety of investment sources enables developers and investors to better choose the funding open to them: they have the potential to decide between traditional funding from UK investors or look to increasingly available international sources of capital.

The environment: the impact on building

The environment and its preservation has become a key topic worldwide in 2018. This focus is filtering down to how people want their office space built, their residential buildings designed and their construction materials made. Clients are demanding more: no longer must a house just be energy efficient, but it must also be smart-enabled, environmentally friendly and cost-effective.

Building regulations move very slowly and so a number of people just follow the rules to mass produce buildings. However, there is vast potential for buildings to be developed to make more of them: one example of this is the 230ft-high running facility at the White Collar Factory.

For huge developments, the message is often ‘the simpler the better’ in the eyes of planners and funders. Those with large amounts of capital often do not want to give millions to developments they see as experimental. However, we can see that very small changes can utilise spaces better for the end consumer, providing easy benefits which can, in turn, be monetised.

There is opportunity here for many developers: if the government introduces legislation, as it has done in other sectors, to encourage the development of sustainable buildings then funders would be more inclined to use what is available. This would then snowball: as more money is filtered in to sustainable property development, then developers would become more experienced with the technology available. Potential clients want the change but are just waiting for developers (and the wider sector) to catch up with that demand.

Wealth of opportunity despite concerns

For developers willing to plan ahead, to look to the future and to seize an opportunity when presented with it there is huge potential over the coming year. The correct strategic decision at the right moment can pay dividends for developers willing to make it.

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Jackie Oakes

Partner London +44 (0)20 7131 4282

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