Off Plan Property Development costs are rising – mitigate them with Off-Plan sales strategies
There are two consequences of Brexit – one intended and one a by-product – both separately and together could bump up the off-plan property development costs for new build property developers in the UK. The intended consequence is a reduction in immigration, the by-product is the fall in the value of the GB Pound. Here, I explore the effects of both, as well as suggest a couple of easy strategies that could help developers mitigate at least part of the most damaging effects of higher construction costs.
Be prepared, the pound could cost you 3%
The Royal Institution of Chartered Surveyors has warned that the falling pound will increase costs in the UK construction industry. The ONS estimates that 10% of construction output represents the value of imported materials. Sterling has lost around 15% of its value since the EU Referendum vote (accurate at the time of writing). Prices of imported goods and services are therefore 15% higher in sterling terms.
Applying these numbers to off-plan property development costs, the RICS calculates the cost of imported materials will rise by up to 3%, and the overall costs of construction of new build from today will increase by more than 1%.
It might be possible for developers to absorb these price increases, and it appears that’s what Bellway plans to do: They said that it doesn’t expect a significant impact on house prices due to the pound’s fall. However, if developers do absorb the extra costs without passing on to buyers, margins will be squeezed further.
Slowing immigration could threaten residential construction
We’ve heard far less about the potential for low immigration to hurt the construction industry than we’ve heard about the possible price perils of the pummelling of the pound. The threat is very real though, and at its heart, is a chronic skills shortage in the UK construction industry.
Skills shortage in the UK construction industry
There are more than 2 million people working in the UK construction industry – and that has hardly fluctuated over the last decade. It’s not fashionable for youngsters to become bricklayers, plasterers, plumbers or roofing contractors:
- A Recruitment and Employment Confederation report in 2015 concluded that the skills shortage in the UK construction industry was at a critical level.
- The Construction Industry Training Board estimates at least 36,000 new workers every year are required to stand still and service current demand only.
- RICS has said that 27,000 new construction projects every year could be impacted by the skills shortage.
More people are retiring from the industry and fewer apprenticeships. In fact, the number of apprentices more than halved between 2008 and 2014. Last year, there were 14,000 new apprentices hired in the industry. That’s some way above the 8,000 recorded in 2014, but even further behind the 36,000 new workers needed each year.
The falling pound and immigration
In the last few years, the construction industry has sought to plug the skills gap by employing foreign workers, mostly from the EU. The falling pound is making working in the UK less attractive for EU-born tradesmen. They tend to send part of their wages home to help support their families, and this is now far less efficient. A pound sent home in May was worth around €1.40. Now that has fallen to just €1.10.
The fall of the pound may do the job of controlling immigration for the government. Even if it doesn’t, it seems increasingly likely that Brexit will mean adopting some form of immigration control. Either way, it’s going to be harder for construction companies to find the skilled workers they need. And that means that labour costs will rise as fewer workers chase more jobs.
What can property developers do to mitigate rising costs of construction?
One immediate and effective solution to reduce off-plan property development costs is to outsource where possible including but not limited to internal sales staff, marketing costs and sales progression services. Savings will quickly be realised in both labour and speculative expenditure. Developers can reduce (or even eliminate) the impact of rising off-plan property development costs caused by the falling pound and lower immigration numbers. Some strategies adopted by property developers to reduce off-plan property development costs may include
- Switching from overseas suppliers to UK suppliers and manufacturers to remove currency exchange impacts.
- Asking suppliers to absorb some of the extra cost themselves
- Larger developers will find such supplier price negotiations easier to push through
- Source materials from alternative, cheaper sources, though it could be a mistake if this affects quality of finish or time to completion
- Reduce cost of sales and marketing, outsourcing time to progress your development sales to completion
Market more intelligently and seize the opportunity
There are many ways developers can operate which might not affect costs that will certainly impact sales. Being able to sell off-plan property fast, within a certain timeframe has a positive impact on cash flow. Finding and using the best partners to drive sales ensures that prices paid remain buoyant and aren’t deflated.
The fall of the pound may have increased construction costs in the UK, but for overseas investors, it has created incredible property investment potential. The 15% to 20% fall in the pound’s value against the euro, for example, has effectively cut UK property prices by the same amount in euro terms.
Property consultants with a network of foreign investors and a distinguished track record give property developers an edge in the sales process. Regeneration, a commitment by the government to spend on infrastructure, and pent-up demand for housing in the UK are the factors that underpin foreign property investors’ demand for new build property post-Brexit.
Excellent property sales partners will work closely with you to ensure that your units reach the email inboxes, desktops and mobiles of property investors. They’ll have a bank of active investor clients whom they know inside out. These investors will trust their property consultants to discover and source only the best residential off-plan property investment opportunities that match their investment strategies.
Be consultative, not pushy to create demand
When you’re working with property sales consultants, ensure they have meaningful connections with their clients and they want to work with you and dovetail with your sales strategy with you. Collaborate on the sales pitch together, be open and help articulate the investment potential and the unique selling point of your development. If there are potential objections, consider and identify how you will overcome these during your pitch process.
Finally, understand that the hard sales routine rarely works with seasoned investors. These people buy once and usually come back for more: these are the real buyers you want access to, for their consistent commitment, experience and understanding of property investment and buying off-plan property.
Make sure you work with a property sales consultant with a solid list of UK and overseas property investors, with a track record and strong relationships. Chose a partner who’ll help build and enhance your reputation, not a ‘here today, gone tomorrow’ salesman who’s in it for the short term.
At Castlereach, we pride ourselves on the relationships we build with developers and investors. We understand construction and know property developers need to make a reasonable profit in the same way that investors need to buy at a reasonable price to make a reasonable and attractive return. Our property consultants work hard with developers and help them achieve their objectives for the benefit of all. With over £850m of new build and off plan sales under our belt, our track record of UK Off-Plan and Off-market property sales speaks for itself.
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