How are material shortages affecting development finance?
As yet more material shortages affecting the construction industry hit the news this week, Gareth Davies, our Head of Development Finance, shares his thoughts on how developers – big and small – have been tackling the problem
Before the pandemic was even on the horizon, as Brexit loomed and started to take effect, the wider construction industry was conscious of the sheer volume of materials we import – and the impact potential delays and shortages might have on ongoing projects and developments.
So, when Covid hit and the UK went into the first lockdown, it wasn’t long before we started to see real shortages of materials throughout the supply chain. While many active construction sites were relatively quick to reopen, there was little clarity across Europe, and further afield, in respect of a road map to properly reopening supply markets. This left us in a fairly uncertain place in the development world. Projects were forced to pause, lenders tightened up their criteria, and developers became more cautious about starting new projects.
But, as we’ve worked through Covid, construction sites in the UK have increased in activity and have widely remained open throughout the second and third major lockdowns, resulting in increased activity across the residential development market. It undoubtedly remains a challenging market but we’re seeing more and more enquiries for development finance, with developers and investors cautiously optimistic about returning to building.
Outside of the development space, we’ve heard lots about the ‘accidental savers’ of lockdown, people who’ve found themselves with surplus cash as a result of international and domestic travel, hospitality and entertainment being closed. Clearly, lots of those have now started to invest in their own homes – having spent so much time there over the past 18 months – and are thinking about putting in a new bathroom or kitchen, repurposing accommodation, extending, or even just redecorating. This is exacerbated further by the explosion in house prices in some areas – where people may feel that it’s better to invest in their existing property, than to enter the process of buying a new home which can both be stressful, and, at the moment, requires the ability to move at lightening speed.
Demand for materials is high, not just in the UK but globally and the pressure on supply chains continues to have an impact on delivery. For both large scale building projects and developments, and small scale residential improvements that require just one or two contractors (or a brave attempt at DIY), being able to access the right materials is critical – and that’s where it requires some careful thinking, and ultimately, some tricky manoeuvring to plan ahead.
From conversations with our developer clients at Hodge, it’s clear that they’ve been monitoring the availability – and price! – of various materials for some time now, and adjusting plans accordingly. Lead times have frequently been extended, and, as simple economics would dictate when demand exceeds supply, prices rise. Just this week, the Construction Leadership Council has warned that cement, some electrical components, timber, steel, and paints are all in short supply.
Planning for the future has never been more important in development finance. It’s far more difficult now to make a last minute call to a supplier at short notice, as products that previously would’ve been available the next day, might now not even be available the next week, or even month.
For developers, big and small, to continue building successfully and to keep control of costs, managing the build programme, human resource, and supply chain is crucial – and building in space for future delays into project timelines and potential cost increases is sensible practice for the foreseeable future.