Post-Election Outlook – Will we see a 2024 rebound?

Businesses struggle with unpredictability, few more so than smaller residential developers. When goalposts move unexpectedly, financial projections no longer stack up, and new ventures are shelved if the future looks uncertain.

Recent years have seen more than usual upheaval from the global pandemic to target-busting inflation and war in Ukraine.

Where we are now

After the flirtation with disastrous unfunded tax cuts under Liz Truss, Rishi Sunak’s government steadied the ship with financial markets.

Nonetheless, other factors have seriously dented consumer confidence.

In an Ipsos poll on June 12, seven in ten Britons described the current state of the British economy as poor, levelling the blame on Covid, Brexit and government policies.

Low confidence translates into a slow housing market.

For SME developers, uncertainty can be frustrating. One Davon client was about to release one of three large homes in a new development when the cash buyer emailed the agent the day before completion to pull out.

A flat market would be bad enough without factoring in high interest rates.

Stubborn land values

Davon’s Chris Hector says: “The challenge is the cost of money linked to interest rates and inflation. The overall cost of funding has increased, making some schemes less viable.”

When interest rates are high, the costs can be eye-watering. One project that recently crossed Davon’s desk saw a 12-apartment scheme where the interest charge on the bank’s £5.5m loan added up to £800,000, roughly equivalent to one of the flats.

Then there are increased costs and stubborn land values to contend with.

Davon’s David Norman comments: “The frustration for so many developers is that costs have gone up and the sales market is flat but the one thing that doesn’t budge is land values. If the value of new homes hasn’t increased but costs have, the price of land should decrease but it doesn’t. So, developers’ margins end up being the shock absorber.”

Post election

Now a UK General Election looms with most forecasters predicting a Labour landslide.

Sir Keir Starmer and his shadow chancellor, Rachel Reeves, have been working to win the trust of business and financial markets while reassuring voters about their economic stewardship. They have ruled out raising any major tax.

Does the impending UK General Election promise a stable economic environment? Stock markets seem to think so with the three major FTSE indices all performing strongly through May and June.

In the current scenario, developers might conceivably feel more confident about embarking on a new project because they can build in risk factors based on how things are now.

And some forecasters predict 20 per cent growth in house prices over the next five years.

Free up capital with mezzanine finance

Then there is the news that inflation has finally fallen below the Bank of England’s two per cent target for the first time in nearly three years. That should translate into interest rate cuts for developers borrowing to finance schemes and house buyers looking for mortgages.

When the market is slow, funds can be tied up in developments that take time to sell. With little cash, SME developers can miss out on a good opportunity for a new scheme.

Davon’s ability to provide a second tranche of investment behind the major lender can free up capital so good chances don’t go missing.

For example, long-time Davon client NK Homes sees using mezzanine finance as a strategic decision to grasp new opportunities, rather than just a way to get an existing project over the line.

Planning Promises

Planning applications were down last year (2023) to their lowest in nearly 30 years, and the number of house completions was down 11 per cent.

Rachel Reeves, the shadow chancellor, has dubbed the current planning framework “the single greatest obstacle to economic success.” Labour leader Sir Keir Starmer has declared that planning reforms will be “bulldozed through”.

Labour’s ambitious target is to build 1.5 million new homes over the next five years. This grand vision hinges on compelling local authorities to identify developable land. Labour also plans to bolster the number of planning officers.

But there’s a critical element of vagueness surrounding their proposal for a green belt review around 16 English cities, leaving many wondering about the specifics and feasibility of such an undertaking.

A cornerstone of Labour’s strategy is the creation of a new generation of towns, a concept steeped in party tradition. Historically, this initiative stumbled when local councils resisted, a challenge that looms large once more.

Shadow housing minister Matthew Pennycock and the Labour leader believe in the power of incremental reforms to perfect urban environments. Yet, as long as the discretionary planning system remains intact, sustaining higher levels of construction appears dubious.

Too little, too late?

Inflation is finally down and lower interest rates must surely follow, but what if they don’t? In the US, the Fed recently announced there would be no cut. And what if interest rates are cut but inflation rebounds?

Despite Labour’s promises on the economy and the pundits’ certainty of their victory, some businesses including developers must be delaying decisions just to be sure how things pan out.

And a series of modest planning reforms looks unlikely to open the floodgates for new development.

The election on July 4 will be swiftly followed by the summer holidays. When people return, will they be raring to go or still maintaining a holding position, especially if their current projects have been slow to sell leaving a cash flow gap?

Maybe the rest of the year will be a write-off.

But thinking more positively, things have been slow for more than a year, so there is pent-up demand, and that means there is potential for the market to flow fast.