After last year’s false start, is there again cause for optimism?

At the beginning of 2024, falling interest rates sparked hopes of a construction boom, but by MIPIM, that optimism had faded. The market faced further uncertainty due to the general election and subsequent Budget.

By New Year 2025, developers were still grappling with cost overruns, high prices for materials, long lead times and expensive labour.

Potential investors in SME resi developments remain cautious, and with higher interest rates on savings on offer, many are content to leave cash in the bank rather than risk it on more speculative ventures.

Market confidence has been shadowed by doubts about the government’s ability to deliver growth.

January brought some relief as UK inflation unexpectedly slowed to 2.5%, paving the way for a Bank of England rate cut that should have eased pressure on the Chancellor but instead it came with a feeble growth forecast for the year. At least, mortgage rates will come down.

House Prices

While agents report rising house prices, the increases are uneven, driven by gains in the north of England and Scotland. Mortgage rates are still relatively high, and the market is sluggish. Smaller residential developers are seeing a 10-15% drop in pricing. Many developers are now adjusting their financial models to account for longer sales cycles and reduced profit margins. Mezzanine finance is increasingly being used to bridge funding gaps as mainstream lenders tighten their criteria.

Mid-Market Challenges

The mid-market faces significant challenges, particularly for families dealing with stamp duty, private education costs and the overall cost of living. These pressures are limiting the ability of second-steppers to move up the property ladder, leading to reduced demand for mid-range homes. With fewer buyers able to afford upgrades, developers targeting this segment are experiencing slower sales and rising holding costs.

First-Time Buyers

Without the Help to Buy scheme, first-time buyers also struggle with higher stamp duty, now that the discount on new homes has ended. Despite calls to embrace renting, the UK remains culturally attached to home ownership. The deposit requirements and mortgage affordability tests remain stringent, making it difficult for many to secure a home. Some lenders are now introducing alternative financing options, but affordability concerns continue to dominate the sector.

Cost Pressures

Developers face ongoing cost challenges, exacerbated by higher National Insurance contributions, a new minimum wage, and still-elevated energy prices. These financial pressures are squeezing margins, particularly for SME developers working on smaller projects. Many are turning to alternative financing solutions, including mezzanine funding, to cover rising costs while keeping projects on track.

Stamp Duty and Tax Burdens

Stamp duty has surged, creating steep barriers. For instance, on a £6.5m property recently financed by Davon, stamp duty now amounts to £695,000. This additional tax burden is discouraging high-value transactions and slowing the prime market. Some buyers are now exploring structured finance solutions to manage upfront costs and mitigate liquidity pressures.

Planning Constraints

SME developers continue to struggle with restrictive planning processes. Delays in approvals, coupled with increasingly stringent regulations, are causing setbacks in project timelines. Many smaller firms face uncertainty as planning bottlenecks impact their ability to bring new housing supply to market.

Last word

It will be another challenging year for SME developers with energy and materials costs still high and brakes on the economy including higher taxes and labour costs.

Low growth limits the Chancellor’s ability to stimulate the economy, but there is hope that lower mortgage rates will add some stimulus.