Can housebuilders and developers benefit from a ‘zombie’ fallout?

During the pandemic a rise in movement from cities to more rural locations triggered investment in rural land and development opportunities. However, changes in the financial climate resulted in some of these developments becoming ‘zombie schemes’ with more debt than profit potential, plunging owners into distress. But as developers seek to sell, is there an opportunity for acquiring parties to continue the build?

Centre for Cities found that during the pandemic the number of Londoners that moved to somewhere else in England and Wales increased by 30% during the pandemic. During this time, interest rates were low, inflation and cost of materials were stable, the market for buyers was strong and the drastic shift from office-based work to remote working looked like it was here to stay.

This climate created the potential for good returns by investing in regional locations and development sites, and many housebuilders – small and large – took that opportunity, likely paying a premium for the land at the time.

Fast forward a few years and the property market has travelled through an economic Alps. The stamp duty holiday ended, inflation as well as interest rates soared, household budgets were squeezed and supply chains were stalled from the pandemic pause in production.

This perfect storm resulted in stalled development completion and created ‘zombie schemes’ that hold more in debt than profit. Much like ‘zombie’ businesses, but with a difference that land tends to hit natural recovery cycles over time if location and environmental aspects are good.

With this shift, it should be of little surprise that our recent Red Flag Alert for Q4 2025 found there were almost 1,400 domestic building companies in critical financial distress, a rise of 55% on the previous year. And with HMRC starting to call in some of the £27.1bn it is owed by businesses, many developers are needing to restructure and lenders are looking to take enforcement action to recover the outstanding debt.

We are seeing the result of this in auction and restructuring work at the moment with developments at different, yet incomplete, stages of construction needing to be disposed of.

Whilst one side of this story is about distress, the other is about rescuing developments from never being built-out and completed. And investors and developers are finding that these schemes can be revived with the right investment, and the right buy-in price.

Looking at the stage of those developments, the appeal is clear. Planning permission has been granted, a number of buyers for completed units have been secured and grid connections are either complete or approved. The shift in price point is the key to viability.

The level of distress for housebuilders at the moment can be overwhelming. However, ‘zombie schemes’ have not just risen from the grave overnight. They are a product of a rapid change in financial and industry climate. Their viability was good once, it is simply the price point that has changed.

Chances are high that more of these schemes will enter the market as a result of tackling distress, administration or paying off unpaid tax. And yet even in financially different circumstances to 2021/22 there is demand for housing. Undoubtedly, developments which have already overcome the hurdles of planning permission and grid connections are appealing and there is significant opportunity to be found in anything that can take one more step to meeting demand and housing targets.

Matthew Hattersley, is director and asset advisory expert at BTG Eddisons, and Julie Palmer is managing partner and restructuring expert at BTG