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Five challenges facing property developers and six ways Hodge can help 

28th July 2023

Welcome to the Commercial Lending July blog

Whether the biggest challenge of 2023 so far has been inflation or the rising cost of finance, the turbulent environment has impacted property developers in different ways.  

Sometimes it’s important to take a step back to really see the whole picture and to catch sight of what’s coming down the line. So, in this month’s commercial lending blog we explore some of the major challenges facing UK property developers and how we’re here to move developments forward, offering shelter from the headwinds developers are currently facing. 

The challenges: 

  1. Rapid increases in the cost of borrowing 

The sharp and sudden rise of the Bank of England base (BBR) rate from 1.0% in June 2022 to its current level of 5.0% only 12 months later, has added to the already high cost of property development. With funders doing what they can to minimise increases in lending margins, the upward shift in BBR has resulted in developers paying close to 11% interest per annum compared to less than 7% around 12 months ago.  

  1. High cost of development 

While we may not be seeing the same aggressive rates of inflation, we saw immediately post Covid, the increasing cost of development hasn't disappeared.  The cost of labour (and availability of some skills), transport and raw materials - especially those requiring energy/fuel to produce them - continue to increase in price, making some developments unviable and creating uncertainty in forecasts. 

  1. End purchaser affordability   

As of 26 July 2023, the average cost of a 5-year fixed rate mortgage was 6.36% and 6.85% for a 2-year fix.  This contrasts, starkly with the position in December 2021, when rates were comfortably greater than half of those of today. As the cost of borrowing increases, affordability can be stretched to a point where refinance or purchase become unviable.   

  1. Softening house prices 

Given the rapidity of mortgage rate increases, it’s not surprising average house prices are softening, and in June, the average property price fell 2.6%, its largest annual decline in 12 years. Sharp increases in mortgage rates often result in reduced affordability for purchasers and as a consequence, buying a home is becoming less achievable for many, particularly first-time buyers where deposits are less and loan-to-value ratios higher. 

  1. Lack of land supply  

Residential development land prices are softening across the UK, which reflects wider issues in both the development and housing markets. While there’s been less land sales compared the previous year, the lack of supply has sustained competition and kept prices high. Unfortunately, it’s the SMEs who often miss out as they cannot afford to pay higher premiums on sites or compete with larger operators with stronger balance sheets. 

How Hodge can help: 

  1. Experienced commercial lender 

Hodge is a long-term commercial lender who has been helping experienced property developers and investors achieve their goals for more than 30 years.  We recognise our goals are aligned and strive to always work with you to achieve a successful outcome. 

  1.  Expert knowledge  

Our commercial proposition is built on our longstanding heritage and significant experience in both the residential and commercial property markets.  We understand development finance and the challenges facing developers today 

  1. Flexible property development and investment finance offering 

We offer traditional development finance loans with stretch senior options (up to £10m per single transaction), acquisition bridge finance (up to £5m), light refurbishment bridging finance (up to £10m) and build to rent options, together with longer term investment finance across multiple asset classes, spanning residential, commercial and mixed-use properties. 

  1. Bespoke solutions 

We recognise the need for caution ahead of starting a development in today’s market.  Confidence in your lender is paramount and we specialise in offering bespoke commercial lending solutions across property development and investment that serve the unique requirements of our brokers and clients. 

  1. Human approach  

We take a human approach to commercial lending – each client has access to a dedicated relationship manager and each application is assessed by a specific underwriter to evaluate its merits and risks. 

  1. Streamlined service 

We pride ourselves on working closely with our brokers and clients ensuring a smooth process for a tailored lending solution that puts the customer first. 

If you’re thinking about kickstarting a development project, we would welcome a conversation to discuss how we could support you with your funding requirements.  

To find out more about how Hodge can help with property development funding please get in touch with our experienced  commercial lending team or email us at [email protected]  

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