There’s no doubt about it, it’s certainly been a newsworthy couple of weeks when it comes to our exit from the European Union. Despite the Prime Minister presenting a withdrawal agreement, there remain huge question marks over just how the UK is going to be leaving the EU in just a few short weeks, with apparently little chance of the agreement gaining the approval of parliament.
The constant uncertainty over Brexit since the vote two years ago has had significant repercussions for the housing market, leading a host of developers – who have excellent prospective projects lined up – to hesitate from starting their builds in earnest.
This is certainly understandable, but in my view it is a real mistake. Brexit or no Brexit, the fundamentals of what makes a quality development project are unchanged. So long as developers focus on getting those fundamentals right from the outset, then no matter what our relationship with mainland Europe looks like, they will be a success.
Finding the right location
That starts with buying well from day one. All developers pride themselves on spotting well-priced sites with potential. But in truth, whether there is a hard border between Northern Ireland and the Republic isn’t going to make much of a difference to the success of your build. A good location for a development doesn’t suddenly become a poor one when we leave the EU.
There is a lot of research and homework that goes into identifying a quality location. Developers need to be confident in the liquidity of the local housing market, that this is an area where houses are being bought and sold. No developer wants to commit to a build in a town where housing is slow to shift.
Similarly, it’s important for developers to establish that there is underlying demand for housing in the area. There are all sorts of different factors that play into why an area would be attractive to buyers, from quality local schools to excellent commuting links. Again, that demand is likely to be far more robust than some nervy developers may imagine – a young family wants a home they can afford near a quality school, regardless of political outcomes this year.
Another key task for all developers is in making sure they have good comparables for the area. That means making sure that the units they put together will be selling at the right sort of level to meet the underlying demand for that region. Once you have done that homework, and have built an understanding of what buyers and renters in the town are looking for – and can afford to pay – then you can proceed with confidence in the knowledge that you are developing units that will sell swiftly.
Finally, developers need to have a clear and demonstrable exit strategy. It’s not enough to have a route into the development – you need to have a clear plan, and at least one back-up plan, for what you are going to do with those units and repay the development finance you’ve used.
Precious little of these key fundamentals in sourcing the right spot for a development will be impacted, directly or otherwise, by Brexit.
Time to show some confidence
Even when you look outside of the factors that go into establishing whether a location is right for your development project, there are other significant plus points to moving now rather than maintaining a cautious approach.
Take financing for example. The rates on development deals are incredibly low by historic standards, and while base rate will go up – the market seems to expect increases in 2019 – they are likely to be modest rises, and should only have a small knock-on effect to the rates developers face.
It’s not just the rates either. There is a significant amount of capital available at the moment, with huge competition between lenders looking for quality developers to lend to. Compare this to the last time developers got such cold feet, during the credit crunch, and the situation could not be more different. Back then lenders were shutting up shop – today we have development finance lenders launching, so keen are they to get into the market.
And then there are the buyers themselves. The UK is a home-owning nation – forget Brexit, our biggest difference from our European cousins is that generally Brits want to own their own home, rather than spend their lives on the rental market. That deep-seated demand is not going anywhere, and we aren’t yet building the homes needed to meet it. In fact, a study from the Herriot-Wyatt University (https://www.independent.co.uk/news/uk/home-news/housing-homeless-crisis-homes-a8356646.html) claims that in England alone we will need to build 340,000 new homes a year by 2031 in order to satisfy demand, a figure we are nowhere close to.
The opportunities are there for developers, so long as they focus on the fundamentals and do their homework. We can only hope that the dominant B word among developers next year is ‘build’ rather than Brexit.
Steve Larkin is director of development finance at LendInvest
