The price of building materials has risen at an unprecedented rate over the past year. The BCIS March 2023 update estimated 9% tender price inflation over the year to Q42022 and forecast a 17% increase over the 5-year period.
In addition, the increased requirements of the latest round of building regulations (Parts B, F, L, O andS) had a grace period until June 2023 for current or ongoing projects, and as such the full impact of these changes will only now start to feed through reported data. On average we have seen assumptions of a 6% uplift in build costs assumed currently.
General inflation has remained above 10% for some time.
The Bank of England Base Rate has increased to 4.25% at the time of writing, further compounding these costs.
Meanwhile house prices have fallen for seven months in a row, with Savills’ Housing Market Update predicting an average 10% drop in the market.
This has led many developers to a standstill with their projects.
Although BCIS notes that build cost inflation will fall in the long term, we have yet to see sustained reductions in inflation at the current time, and the BOE continues to raise interest rates in response, which will keep costs rising for the foreseeable.
These high prices are going to have ongoing consequences for property developers in the UK, causing many to pause or mothball sites and hold off on supply until the market environment improves. This in turn may bolster sales values as costs ends up being passed on to the customers.
So, how does this affect viability?
Build costs and finance costs are an integral element when it comes to calculating the viability of a scheme. If the cost to build your proposed development is particularly high, and house prices are falling or stagnant, this will impact the overall viability. However, given the scale and speed of inflation more recently, the data underlying many assessments may underestimate required costs.
The main source of build cost data used in viability appraisals is the Build Cost Information Service (BCIS), whilst a useful tool, there is a significant lag between the reporting of project costs and the data being published, therefore, costings listed are often behind current rates.
Furthermore, projects reported on the BCIS are predominantly from large scale developments of 50+ units, meaning that smaller sites will not benefit from the same economies of scale.
Obtaining a Quantity Surveyor’s site specific cost plan for your development can be a way to show the true costs involved, and therefore demonstrate a more accurate impact of costs in the viability discussion.
Subsequently, given the large economic changes bucking the norm over the last economic cycle (low interest rates, low inflation, high house price inflation), submitting a viability assessment and detailed QS cost plan alongside your planning application could help reassess whether there is any surplus available to give towards affordable housing and Section 106 contributions, enabling more deliverable development in a difficult economic climate.
Get in touch with one of our experts today for a free consultation on how we can help save you money on your affordable housing contributions and keep your development viable.
With a national need for both affordable and private housing, we must do what we can to help bring housing forward.