Assetz Capital has warned that construction costs and supply chain issues are pushing up the price of new builds and impacting the profitability of development projects for borrowers.
The peer-to-peer lending platform said that macroeconomic pressures and geopolitical instability have put significant upward pressure on construction input prices which is impacting housing development viability.
Assetz Capital cited the latest official construction output data which showed the costs for new housing in the UK rose by 9.9 per cent over the last 12 months, while the average new house price was £312,000 in the fourth quarter last year, which was the same as the first quarter of 2020 pre-Covid.
This has led to an “incremental decoupling” between construction costs and sales prices, which is challenging the viability of many development projects, Assetz Capital added.
The platform said this, alongside extended supply chain timeframes and a huge rise in energy prices because of the war in the Ukraine, is creating downward pressure on the profit margins of new housing developments.
“Cost increases mean that developers must ensure that their financial appraisals are accurate and current, when seeking development financing,” Assetz Capital said in a blog on its website.
“Lengthening supply chain timeframes are resulting in development programmes exceeding project timelines and budgets.
“Financiers are factoring in price increases and lengthened timelines which can result in pressure on leverage ratios and restrict funding availability certain projects.
“In addition, contingencies are being fully utilised and lenders are increasingly requiring developers to have up to 15 per cent to 20 per cent contingency built into the loan to ensure funding for anticipated cost overruns.”
Assetz Capital said that the platform has been working with its existing and new customers to find flexible ways to ensure that projects are still profitable, while also ensuring appropriate contingencies are built into the deals to make sure that there is enough liquidity to complete them.
“In some cases, we have been able to rely on a cost over run guarantee from a contractor of strong financial standing and good experience, with a fixed price Joint Contracts Tribunal contract in place, to top up the contingency in a transaction,” the platform said.
“We have also been able to push leverage up in situations where the developer is willing to provide a higher personal guarantee or has been able to secure a certain level of reservations pre development commencement. These are all strong mitigants to the current pressures being exerted on development funding structures.”