Here is what they can do to help mitigate against rising project costs.
Managing a project on the ground and keeping it on programme has proven to be challenging for many real estate developers who, over the past 18 months, have had to navigate rising materials prices and labour costs.
Combined with the recent rise in energy prices and interest rates, project costs remain high and cost overruns are becoming more frequent.
More than 80% of our clients have multiple projects at various stages; some are completing units on one scheme, progressing through construction on another and in the process of acquiring a third.
The big question is how they can mitigate against the impact of spiralling costs?
These are five things a real estate developer can do to ensure their projects stay on track.
- Find a lender who is also a project partner – a lender who wants to be a partner, whether they are offering a senior or mezzanine loan, will manage the interest of all parties. That means seeing the project through to completion and helping to ensure everyone achieves their commercial ambitions. When approaching a new lender, always ask how they have collaborated with their developer clients to realise their projects; ask for specific examples so it is clear how they operate through challenging times.
- Lock in prices now where possible – this is easier for the bigger housebuilders and developers and not so easy for SMEs. With the cost of some materials projected to rise to 20%, having an ability to lock in the price ahead of time will insulate against future price hikes. It will require capital upfront but may save greater expenditure over the long-term.
- Securely store materials and purchase now – again, easier said than done as it means an initial, additional cost. Purchasing containers or using warehouse space may be a cheaper option than buying materials – that may or may not be available – in the next six to 12 months. Insurance and security will also need to be taken into account so it is important to weigh up the costs of buying now, or risk paying a higher rate later.
- Let the lender know of any issues as soon as they arise – it is always easier to solve a problem in partnership with your lender, than without. The earlier an issue is raised, the earlier a lender can determine:
- Whether there is any room to increase their loan
- Whether to source funds from a third party; whether this is a mezzanine loan or it might be helping to move a developer’s own funds around
- If the loan needs to be restructured
All these options take time so raising issues as soon as they arise avoids a pause in the project while extra capital is organised. Effective communication and problem solving in partnership, early on, will keep the project moving.
- Explore the market for new, additional capital – there is a wide range of diverse and alternative lenders that sit outside traditional lending routes and there is plenty of capital available if you explore the market. We are seeing an increase in mezzanine loans being sought out to cover increased costs. As a top up to a senior loan they enable a developer to see a project through to completion, therefore protecting the project as well as the original loan.
Callum Ferguson is Head of Business Development at Clearwell Capital and has executed transactions throughout the development finance capital stack including joint venture equity, mezzanine loans and senior development finance.