Making predictions
Predicting the property market, when it is at its peak or its lowest is difficult. However, for a property developer, the time is right if they can mitigate risk. In order to make informed and effective decisions, developers need to have a deep understanding of their market.
It is the length of the development process, from looking for a suitable site, all the way through to having properties to sell, which often takes several years, that makes the timing difficult to predict.
The development market cycle can be represented as a clock, at the top, 12 o’clock, is the peak of the cycle, at 6 o’clock, the bottom of the cycle, with four phases: Maturity; decline; bottom, and growth. An investor would ideally buy at the bottom of the market cycle and sell at the top, but not only is this difficult to gauge but there are also many obstacles to be overcome along the way and when you look at developers rather than investors it is even trickier.
Forecasts
But where are we on the clock now? Forecasts from Savills indicate that property prices should rise by about 15% in the next 5 years, Knight Frank also foresees a 15% cumulative house price growth by 2024 and Hamptons forecasts a slight rise in 2021, then a pick up in 2022/3. These experts suggest the growth phase, but it is just a prediction. With Brexit and the effects of the pandemic, predicting the markets has never been trickier.
As it is impossible to give a definitive yes or no answer to whether it is the right time, we offer some arguments both sides of the coin.
For
- With the housing shortage, planning for residential developments seems to be encouraged by local government as they strive to reach housing targets.
- More financial products to help raise funds are becoming available.
- home building fund loans £250K to £250m to cover development or infrastructure costs.
- Homes England/Invest & fund offering SME builders up to 80% loan to cost loans for smaller projects (2+ homes).
- For buy to let landlords, paragon bank have an 80% LTV mortgage for homes with an APC rating of A-C
- Houses are selling; first-time buyers make up 40% of the market share outside London as the government offers incentives.
- Help to Buy scheme – first-time buyers can borrow up to 20% (40% in London) of the purchase price, interest-free for the first five years.
- Shared ownership offerings, making home owning more affordable.
- Government mortgage guarantee scheme to help buyers who only have a 5% deposit
- Confidence is returning to the property market (see graph below).
- Ability to sell off-plan gives developers access to funds.
Against
- Stamp duty holiday will end and the market may experience a stagnation.
- The incentive is due to end on 30 June 2021
- As pandemic-related government grants and schemes are withdrawn, the economy will go through a phase of uncertainty, people need to be sure of a steady income before they commit to buying a property.
- The length of the process from planning permission to construction makes the cost of finance before any return high.
- Steps in the development process include:
- market analysis
- site selection
- site acquisition
- planning and engineering
- financing
- construction and marketing
- Steps in the development process include:
- Construction costs are on the rise as Brexit hits and costs of importing materials increases.
- Fear of further restrictions being brought in due to Covid-19 variations may make purchasers nervous.
Conclusion
It is vital that a developer looks at all the costs, including a contingency for extra unforeseen costs and all financial costs, at the potential selling price and at demand. Completing several different modelling scenarios will provide a clearer picture and sensitivity analysis will show how much leeway there is within the figures.
No venture is without risk, especially with property: do your due diligence, invest in the right skills.
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