Rise in build costs and loan facilities

By Guy Murray, Head of Development Finance, West One Loans

The shortages of materials and labour in the construction industry have been well documented but the latest government figures suggest this may be easing a little. 

Material costs were 23.6% higher in September than 12 months previously and have risen every month for the past year. However, the monthly rise in September was just 0.1%. 

Most of the projects we lend on have completed on time, but the main impact we've seen is that some developers have had to raise more capital to cover the extra outlay.

This usually happens towards the end of the build when it becomes more obvious that final costs are going to be higher than originally accounted for, even with contingency built in. 

We've tried to support developers by remaining more flexible in allowing them to top up facilities given the material cost rises have impacted the whole sector.

When build costs are rising, it's important that funders are able to act quickly and decisively on any facility changes. The last thing a developer needs is time delays on their cash flow as that will lead to a slow down on site progress and potentially further increases in the price of materials. 

We've been able to act quickly with any changes to facilities as we always stay close to our customers and the sites we lend against, along with having a great team of monitoring surveyors working for us.

From a funding perspective when the project is close to the end, the risk for us is amending facilities is reduced. This is because we have a good insight into remaining build works needed and visibility on the sales activity within the development.

The counterbalance to rising build costs has been the rise in property prices so in many cases the extra build costs are being balanced out by an increase in sales values. One development we lent on saw build costs increase by £150,000 but the value of the properties went up by £500,000, so the developer still made a good profit. 

As for labour shortages, we have seen a bit of that but we tend to work with seasoned developers who have a regular team of tradespeople they use and can rely on.

If you're a developer and struggling with an increase in build costs, ensure you communicate the situation with your funder so they can work with you to find solutions to help you through.