Before we launch full-steam ahead into 2024 we wanted to take a moment to discuss the highs and lows of the rollercoaster that was 2023 - and make a few predictions for the year ahead.
We sat down with some internal and external experts to share their insights from the last year, and to provide some predictions for 2024. Our experts cover a wide range of development issues including project financing, national and local policy changes, and on-the-ground experience of project delivery.
Below, you’ll learn more from our experts including: Harry Quartermain, Head of Research and Insights at LandTech, Lynsey Kay Porter, Development Manager at Antler Homes, and finally, LandTech’s LandFund team: Harry Eddery, Head of Development Finance and Oliver Holden, Senior Broker.
The insights from 2023
First, we’ll kick off with expert’s insights from 2023. We’ll take a look at Harry Quartermain’s view on the ebbs and flows of policy change, Lynsey’s perspective on impact of the 2023 housing market, and Harry Eddery’s insights on changes in the lending community.
The year of policy change and uncertainty
2023 was a year that saw policy change, and the promise of policy change, become a golden thread running through the year. The Government published a new draft of the National Planning Policy Framework (NPFF) just before Christmas 2022, and then released the final version of this policy update just before Christmas 2023. Lots has already been written about the impact of the policy changes, including this, this, and this.
Between these two policy change bookends, 2023 included a lot more change as the goal posts were moved (or at least attempts were made to move them) in relation to Biodiversity Net Gain, which saw further delays to implementation; and to Nutrient Neutrality, which was a failed attempt to legislate away decades of chronic under-funding of our privately owned water infrastructure.
Policy change leads to uncertainty, but changes to planning policy is only minor-league uncertainty when compared to changes in economic policy. It may seem like a bad dream now, but September 2022 saw a disastrous 44 day-long Liz Truss premiership, which by some accounts cost the nation £30 billion and saw interest rates, and therefore mortgage payments, skyrocket.
All this uncertainty contributed to an apparent slow down in the development sector as the number of planning applications submitted decreased over the first three quarters of the year by around 13% compared to the first three quarters of 2022.
With increased mortgage costs stifling demand, and decreased applications and approvals stifling supply, what seems like a perfect storm for the development sector saw planning take a central role in 2023’s party political conference season. We looked at this back in October and talked about this in the Real Developer Podcast.
-Harry Quartermain, Head of Research and Insights, LandTech
Harry is a Chartered Town Planner who has nearly fifteen years working in the private sector, working across Development Management, Planning Policy, and Environmental Impact Assessment; in Australia and the UK.
An SME's perspective on the 2023 market
At Antler Homes, we are still seeing strong demand for quality products, particularly houses, in good areas. As we tend to sell to buyers that are either downsizing or upsizing for family growth, there is often significant equity within their last home which means that our buyers are less impacted by mortgage availability and rates.
Also, as an SME, we are conscious that the only way to get through tough times is to keep trading. We want to keep acquiring excellent opportunities and ensure that when the market returns we have some fantastic sites, and products, with the team that can support the increased trade.
This year we have actually seen more opportunities on the land desk as some other companies have stepped away from the land market. This gives us the opportunity to review more opportunities and negotiate on the best ones. Sales may be slower and some incentives and discounts are needed in some locations, but we are still reserving and selling. We remain optimistic and many of our competitors are still reporting strong sales so we know we are not alone.
Ultimately housebuilding is resilient, the market will return. Supply is low and demand will remain high as the industry consistently misses the government targets.
We do use funding on some opportunities and many will be finding securing this tougher due to higher interest rates and increased due diligence being applied by lenders. We have strong relationships with the few we use, and they continue to perform for us.
-Lynsey Kay Porter, Development Manager at Antler Homes
Lynsey has been in property finance and development since 2016 and currently manages projects and all affordable housing deals at Antler.
2023 saw changes in the lending community
Dichotomy is the word I would use for this year. Pockets of properties selling extremely well, others hanging around. The well designed family homes in leafy green lanes have certainly been the favourite. My belief is that if you build the right thing in the right place it will always sell, it might take longer in a turbulent economy, but it will always sell.
This year, we have seen lender criteria change regularly; staying on top of this has been paramount in structuring deals and showing your value as a finance broker. Staying abreast of these changes has certainly separated the wheat from the chaff.
Some ‘reading between the lines’ has been required for the lending community, as abrupt changes in criteria can mean a slight disconnect between credit appetite and what is being ‘sold’ into the market as their appetite. Nothing untoward here, just a natural time-delay for new sentiment to trickle down.
Some notable changes in the lending community this year have consisted of:
- A deeper dive into assets and liabilities, and access to liquidity, for potential cost overruns;
- Experience - This has always been one of the main pillars for any funding application however the scrutiny has been substantially higher than it was previously.
- £1M + units - Whilst some may argue that this has been the area of the market that has done the best this year, most lenders have been extremely cautious in this arena.
- A rise in lenders seeking alternative asset classes to standard family housing such as Purpose Built Student Accommodation and the aged care sector.
There’s no point in going over the topics of build costs and interest rates here, nor how these have affected new sites stacking as these are topics we are all well versed in after this year, so let's just hope for the decreases we are all optimistically anticipating in 2024.
The thing that we did find strange in 2023 is that as rates and build costs rose we did not see the assumed correlation with land prices. Land prices in general seem to have ‘held fast,’ so let's see what 2024 brings.
It has only been Q4 of 2023 that we have seen valuers and monitoring surveyors being slightly more ‘conservative’; this is likely due to a plethora of reasons but in the most part we have not had any big disagreements that have ‘killed’ deals. We know for many this has not been the case. Our success in this area is likely due to the large volume of data we hold to verify the GDV and build costs of a given case.
All in all, I would say it’s been tougher to structure deals this year than in previous years due to sites being tighter on profitability. Many developers took the stance of ‘wait and see’ at the start of the year, couple this with planning delays and you have a potent mix. Yet, even with these challenges, there was still a substantial amount of business written in 2023 and this clearly demonstrates the resilience and tenacity of the development community.
-Harry Eddery, Head of Development Finance, LandTech
Harry has established two finance brokerages from the ground up and has played a pivotal role in creating the LandFund Platform.
A look ahead to 2024
In this section, we’ll be learning more from our experts on what they think could happen in the year ahead, including a General Election, a renewed sense of optimism for SME developers, and normalisation of interest rates.
The knock on impact from 2023's policy uncertainty
Following the Government’s Christmas gift(s) of two new NPPFs in two days, and the subsequent policy shift in the application of the Presumption in Favour, some time (at least) in 2024 will be spent working out if certain LPA’s have to demonstrate 4 or 5 years of housing land supply, and what version of the NPPF should apply to what planning application. What a time to be a lawyer.
We can also look forward to more uncertainty regarding Biodiversity Net Gain as the cornerstone provision of the Environment Act 2019 finally comes fully into effect while the Government continues to tweak the guidance to make it reasonable and implementable.
The most important endangered species in relation to this legislation is likely to be ecologists themselves as some have taken early retirement, while the ones that are left struggle to fully understand and implement the Guidance.
For developers that can find and afford an ecologist, and therefore move sites forward, I think 2024 will see an increase in the importance of offset sites, with locations that can’t be used for housing (e.g., Green Belt and Flood Zone 3 sites) suddenly seeing their development value demonstrated.
The other event that will come in 2024 will be a General Election. While anyone who’s been paying attention will no-doubt be looking forward to the potential of a new government, even if this happens it’s unlikely to be the panacea that the industry is yearning for.
Policy confusion sown by successive prime ministers (Boris’ Planning for the Future - anyone?) will take some time to unwind and confidence may be slow to return. But, return it will. A low bar though it may be, I’m expecting 2024 to be better than 2023.
-Harry Quartermain, Head of Research and Insights, LandTech
Stabilisation and renewed confidence for SMEs
After a year or so of instability, the build costs are finally stabilising. We are also seeing inflation reduce. This is massively helping SMEs, like Antler Homes, to be able to accurately review opportunities and improve margins on our sites through asking for repricing or value engineering throughout the build programme.
Bank of England rates look like they might have peaked and this is also returning some confidence to the market from buyers and suppliers.
We see 2024 bringing more opportunities and a more confident buying market.
-Lynsey Kay Porter, Development Manager at Antler Homes
A level playing field for lenders and the benefit to borrowers
As we move on from a turbulent 2023, 2024 certainly brings with it the expectation of market stability, consistency and excitement.
Slow sales being seen in the residential market, coupled with extreme highs of residential mortgage costs, have caused significant headwinds for developers and a rise in sales guarantee facilities.
One of the recent highlights in December 2023 was the continuation of long-term SWAP rates holding way below the levels seen in Q1 & Q2 of 2023, something we expect to continue into 2024. This presents great optimism for developers looking at projects whose eventual buyers should be seeing cheaper and more affordable mortgages at the point they come to market over the next 12, 18 or 24 months.
The more immediate upside is that this lower cost of capital is coming through into development debt markets in 2024. We have seen in the past 12 months lower headline margins coming into play to offset the ever-increasing cost of wholesale money biting into all but a few balance sheet lenders.
As these costs continue to plateau or maybe even reduce, we expect to see a more even playing field for lenders, which gives a variety of compelling options for borrowers. The offshoot for this will be a raft of creative funding structures aimed at proving a genuine edge - we previously have seen the success of discounted ‘green’ loans for example. We expect these to continue in a myriad of ways, all of which will benefit borrowers and future homeowners.
Stability equals optimism, something that we will undoubtedly start to see more of as the wheels of 2024 begin to turn. The previous 12-18 months have seen high land prices with high and shifting costs to developers. The instability was the handbrake in the market. That handbrake is slowly but surely starting to ease, which will unlock land previously unattainable to all but a select few.
-Oliver Holden, Senior Broker, LandTech
Oliver is the Senior Broker at LandFund with over a decade of experience in real estate finance.
Happy New Year
While 2023 was a year full of highs and lows, as well as plenty of change and uncertainty, our experts agree that there could be a sense of renewed optimism in the market as we move forward into the new year.
We hope you too are feeling the positive winds of change in your business - and if you’d like to learn more about how LandTech can make a difference to your 2024 plans, reach out to us for a quick chat by clicking the button below.