Rapid Construction Sector Growth: What This Means for Developers

Over the past 18 months the construction industry has seen record lows and, now, record highs. From a period of complete shutdown to higher than ever demand, property construction is booming. So, what does this mean for developers?

A tower of scaffolding at sunset

Construction Sector Growth: The Facts

Growth in construction is generally understood to equate an IHS Markit/CIPS purchasing managers’ index (PMI) of over 50. In June, PMI hit 66.3 – an increase from 64.2 in May – signalling particularly rapid growth in the sector. In fact, this is the construction industry’s fastest rate of growth in 24 years.

This rapid growth is attributed largely to the housing sector. Speaking to The Independent, Tim Moore, economics director at HIS Markit, said:

“Total new orders expanded at one of the strongest rates since the summer of 2007, mostly reflecting robust demand for residential projects and a boost to commercial work from the reopening UK economy.”

The June figures are the latest in an extended period of growth, with total new orders having now increased for each of the last 13 months.

From supply and lead times to the possibility of inflation, this rapid expansion could have knock-on effects for property developers.

The Issue of Supply

With such unprecedented growth, it comes as no surprise that a number of construction firms have reported supply shortages.

As firms struggle to keep up with demand, added complications of supply chain bottlenecks and shortages of raw materials are resulting in added complications.

During the June peak, lead times are reported to have lengthened to the greatest extent since first surveyed in 1997, causing widespread delays.

Inflation

Due to the combined problems of the availability of raw materials and stressed supply chains, inflation is another pressing concern. Max Jones, director in Lloyds Bank’s infrastructure and construction team, says:

“Pent-up demand for work on commercial projects in major cities, infrastructure in the regions and housing developments across the country threaten a battle for materials that many report are in short supply.”

“This will create pinch points and potentially push up prices, eroding margins.”

Our Advice for Property Developers

If you are planning a development project, then protecting your investment and maintaining high profit margins are key concerns.

The rapid rate of growth in the construction industry has brought challenges with it. However, we predict a return to more standard levels of growth soon, as pent-up demand is dealt with, thereby reducing pressure on the industry.

As a property developer, if you are considering a new project there are a number of steps you can take to prepare, and to prevent issues with contruction:

“Buying a scheme for the right price is key. Understanding the potential costs, building in a strong contingency and sales period will mean that you are still achieving your profit and covering any risks.

To ensure your project is viable, you may need to offer below the asking price, and if you are required to approach several sites consider this time well spent.

Having the right professional team around you is key. This will cover every angle around certainly of costs, strong contracts and making sure that each scheme is presented and guided through to realisation with its best possible chance to succeed.”

Tom Lee, Managing Director, Pure Structured Finance

Bespoke Development Finance, From the Experts

Finding the correct finance for a complex development project doesn’t have to be an added issue. Streamline the process by talking to a member of our specialist development finance team.

Whether you are an experienced developer or embarking on your first high-value project, we can make the process of securing structured finance simple and stress-free.

Call us today on 02080 579 178 or request a callback at a time that suits you.

Article By Harry Hodell

August 9th, 2021

Harry is a Director of Pure Structured Finance. He has a specialist lending background on structured investment facilities across all asset classes in UK and Europe.

After several years working for specialist lenders and operating closely with clients to deliver complex borrowing structures, Harry has now turned his focus to provide his clients with bespoke debt, equity and mezzanine facilities through a large number of specialist lenders.

The vast majority of Harry’s clients are mid-market developers, investors and funds across UK and Europe with whom he has long-standing relationships.

See more articles by Harry