The importance of – and growing demand for – development exits

In the first quarter of 2023, Avamore received 110 enquiries for Part Complete Development (PCD) product – 35% more than during the same time period in 2022. In fact, in Q1 this year alone, we hit 47% of the total enquiries for PCD in the last year. This noticeable increase comes as market turmoil further takes its toll.

Material shortages continue to drive up development costs and alongside rising inflation, this has meant that even contingency funds are no longer sufficient to cover expenses. The Office of National Statistics (ONS) in March 2023 reported that 25% of construction businesses in the UK were experiencing material shortages.

Partly as a result of this issue, developments are taking longer than average to complete. Worryingly, respondents of a Cornerstone survey said that 28% of respondents in 2022, estimated that more than 50% of construction projects now experience delays of one kind or another, compared with just 15% in 2016.

With mortgage lending this year hitting its lowest level since 2016 excluding the pandemic, sales are also now taking longer to complete than before. Homeowners borrowed £700m in February, down from £2bn in January, banks have reported. This is the lowest level since April 2016 excluding Covid. Mortgage rates began to rise last year as interest rates climbed and spiked in September following Liz Truss’s mini budget, which caused panic on financial markets. Rates have begun to stabilise but remain much higher than they were a few years ago. According to Moneyfacts.co.uk, for home owners and those looking to re-mortgage, the best two-year fixed rate mortgage is 4.74%. To highlight how much things have worsened for borrowers over the past year or so, in October 2021, the cheapest fixed rate was just 0.84%.

With many developers relying on the sale of units to exit a scheme, the timeline from initial build to final sale is being further stretched, putting greater pressure on them when they are trying to secure funding. To further compound matters, developers are also finding that initial GDVs are dropping by the time practical completion is reached.

Property prices fell overall for the fifth month in a row in January as the UK housing market continued to cool following soaring growth during the pandemic. As homeowners’ appetites waned, landlords made 12% of all UK house purchases in 2022 – the highest level in six years – which means that there is an option out there for developers.

The private rental sector (PRS) is currently the UK’s second largest housing tenure, consisting of roughly 4.5 million UK households (or 20% of the total). It is estimated that PRS supply will have to increase by 227,000 homes a year over the next decade to meet the forecasted demand for 1.8 million new households by 2032, making it a solid option for those looking for alternative ways to exit their schemes.

It is clear that demand for housing still exits, but it might take more time to find the right end buyer. The power of a development exit is therefore critical at a time when the market isn’t moving as quickly. Extending the sales period can ensure that developers are getting out at the right price. BTL rates look to be stabilising as they decrease month after month; in November, the average rate was 6.76%. However, it is now 4.79%. We may therefore start to see an even further increase in landlord investment, but this could take a while to filter through.

To compensate for this time lag, it is important to have a supportive lender that recognises the current challenges. A development exit can help take the pressure off having to find the right buyer and it also allows the borrower to retain net sales proceeds providing additional cashflow. The landscape is changing and it is critical that we, as lenders, evolve with it.