A RICS survey has revealed that surveyors expect construction costs to increase by 8% as a result of the current material shortages, which follows a similar flurry of headlines reporting inflation increases and waiting times of 66% as the demand for materials continues to surge.
So how is the shortage of construction materials impacting the property market and should we be worried about the implications?
Paul Aylott, Head of Valuation and Business Space Lease Advisory, comments: “Increasing construction costs can have two possible outcomes: one is driving down the value of a site, and the second is reducing the profit margin achievable from a scheme.
“In appraising sites for development lenders, we are taking a considered approach to valuation appraisals to reflect the risks associated with the rising cost of materials and possible interruptions in the construction timetable. This may show a differential in the purchase price of land acquired over the past few years at a time when these factors had not come to the fore and were therefore not factored into the site acquisition appraisal. Alternatively, if land supply is scarce and demand is strong, the site value may be preserved but the profit margin achievable might be squeezed. In a period of rising house and commercial property values, the squeeze may be less severely felt but if values begin to plateau, this could become an issue.”
Max Jones of Lloyds Bank recently commented that the supply problems are not experienced equally, with larger contractors able to plan and buy in stock in advance, but local and regional developers facing more constrained budgeting that is impacting the delivery of construction materials to site.
How can supply chain issues like these be navigated?
Paul says: “Because we work collaboratively across the business, we’re able to liaise with our in-house building surveying colleagues to obtain real time construction cost information and their opinion based on live cases, as well as the view of our Residential Development Agency regarding supply and demand for sites. This is invaluable in informing our approach to development site valuations and has been hugely beneficial to clients in recent months.”
From a residential point of view, Head of Residential Development Agency, Keith Brelsford agrees with Paul’s comments on the impact on site values. He says “due to limited land supply and strong demand, we are seeing an uplift in value in certain locations. Increased build costs are being counterbalanced by values and developers acquiring development opportunities at reduced margins. This also reflects the competition for sites, especially those that already have planning. For us as agents, it’s just one of a number of issues developers are grappling with when trying to be competitive on bids. Discussions with housebuilders and developers highlight anecdotal evidence of increased build costs, which includes the cost of labour as well as materials.”
While we can’t resolve the materials shortage, we do have the resources and capability to help you navigate it. Contact us to discuss your property needs.