Green shoots show in the development market

   Guy Murray - Head of Development Finance, West One Loans

Anyone who has worked in property or development for a reasonable amount of time will know that the market goes in cycles. 

The 'ebb and flow' means that at any one time, it is either experiencing crash, correction, recovery or something akin to a rally.

For the past 18 months, it has felt as though we are living through a market correction, with higher interest rates sapping demand for newly built properties. At the same time, the biggest bout of inflation in four decades has led to a surge in the cost of both materials and labour, which has hit developers hard. 

The combination of these factors has led to a significant slowdown in the purchase market, and unfortunately also to the demise of several developers and other related firms. 

However, while the past year and a half has been difficult, it feels as though the green shoots of recovery are starting to emerge. 

Why? First, it looks as though the Bank of England's (BoE) tightening cycle has come to an end - unless, of course, inflation starts to pick up aggressively again. 

Most observers now predict that the BoE may even be forced to cut rates by as early as the summer in order to jumpstart the UK's stagnant economy.

This won't lead to the opening of the floodgates, but it will give a confidence boost to a market that was in dire need of it.

Barometer for optimism

In fact, if you look at the latest trading updates from the largest developers, there are signs activity is picking up even with the hint of future rate cuts. While most housebuilders are selling fewer homes than they were a year ago, Barratt Developments, Persimmon and Bellway have reported an uptick in reservations in recent weeks. 

Barratt has seen its net private reservation rate per active outlet rise from 0.49 in January last year to 0.6 this January. Similarly, Persimmon, Ballway and Vistry Group reported a 9.3%, 15.4% and 18% uplift, respectively, in their reservation rates. 

Further, Berkeley Group recently revealed that "enquiry levels are good," again as would-be buyers anticipate rate falls.

Of course, while these large housebuilders don't account for the whole market, they offer a good barometer of conditions as they currently stand. It seems as though the data is pointing toward signs of recovery.

Anecdotally speaking, I have also noticed a palpable improvement in optimism levels in my conversations with developers so far this year. 

Most I speak to expect they will do at least as well as last year, and most likely better. 

That said, there is no denying that challenges remain and a full recovery is some way off yet. Interest rates remain high by recent historical standards, and even when they do fall, we won't see a return to the ultra-low levels that we have become accustomed to.

This means that developers and buyers alike may have to get used to a 'new normal' with rates in the 3% to 4% range.

They will, and in time we will see a complete recovery in purchases activity once the shock of rising interest rates has worn off.  

For that reason, I'm cautiously optimistic or the remainder of the year, and especially H2, when we may see the first of those widely anticipated interest rate cuts starting to filter through.