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The rising cost of construction in a changing landscape

From the cost of petrol to a can of coca cola; we are all feeling the rising cost of living. The causes are wide ranging and include quantitative easing, the global recovery from covid, impacts of Brexit and war in Ukraine. These factors have culminated in us all now feeling the economic pinch; and the material costs in construction are no exception.

There was a time where price inflation across assets with a fixed supply (e.g., land and housing) outperformed base inflation. Whilst material costs were always increasing, land and house prices were increasing faster; and developers subsequently benefitted from improved margins. It has come to pass that this is no longer the case and the margins for construction are being increasingly squeezed. Combined with rising labour costs, this squeeze has caused year-on-year prices for building work to rise by an estimated 25.2% in just 12 months from April 2021 to 2022.

Source: https://www.homebuilding.co.uk/news/construction-materials-shortage

The economic pinch is most acutely felt by SME developers. Those chasing land acquisitions at 30% of GDV are seeing their margins be squeezed further. With increased and unavoidable construction costs to incur, developers are looking to reduce the land acquisition cost to avoid taking on unwanted risk. Whilst these offers are understandable, many landowner’s (also, understandably) aren’t prepared to make such a concession on their sale price. It often feels like developers have to make offers that barely motivate a landowner to pick up the phone, or they must take on unwanted financial risk to get a deal over the line and progress a new project.

Where motivated sellers are marketing their land through agency, the opportunity is commonly offered to a range of developers who invariably end up bidding each other out of any margin. Is there a more efficient way in these evolving times?

At VirginLand we provide new meaning to “off-market deals” and identify opportunities that are unique to each client’s specific set of search requirements. We focus on areas where the need for our client’s product or service is in demand, and only write to landowners once we are sure that their site is particularly well-suited to the proposed development needs of our client. Landowners are often unaware of the nuances of their local authority’s planning policy and hadn’t previously considered a change of use. Our in-house planning team are well placed to offer proactive value-add insights that unlock the full development potential (and value) of a specific parcel of land through planning gain.

The outcome is a win/win/win scenario for the landowner, the developer and the community:

  • The landowner has unlocked greater value for their land.
  • The developer achieves planning gain by redeveloping the site for its most suitable purpose (as laid out by local planning policy).
  • The community benefits as the local planning policy is determined on the basis of community need.

VirginLand democratises the site finding process, specifically matching developers of all levels, shapes, sizes and interests with specific parcels of land that best suit their favoured development strategies and best serve the local communities.

With margins being squeezed by external factors outside of our control; it has never been more important to pursue data driven efficiencies at acquisition to maximise returns and incentive for developer, landowner and community.

By Oliver Wahlgren

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