UK Real Estate Development: Can It Still Stack Up?

The slump in new-build construction continued at the start of the year. February marked the 14th consecutive month of declining activity, and the pace of decline had quickened since January.

“The industry is being held back by significant and longstanding challenges,” said Phil Westerman, head of real estate at accountancy practice Buzzacott. “The government continues to create uncertainty with its policies, or lack of policies, and businesses need to find alternative ways to secure and progress projects that are both deliverable and financially viable.”

Bisnow spoke to Westerman about the current challenges and the solutions that might be available.

Planning And Regulations

The first key challenge is the current planning regime, Westerman said. Clients have commented that schemes are taking at least 26 weeks to get through planning. 

“The need to deal with the requirements of the Building Safety Act continues to impact businesses,” he said. “Companies have had to deploy people to a specific team to focus on addressing historic building safety matters across multiple projects.”

To navigate the planning regime, some developers are forging closer partnerships or even joint ventures with local authorities, such as Milton Keynes City Council’s agreement with major housebuilders and landowners. Another example is the Mayor of London’s programme to unlock sites for small builders. 

“Establishing or improving communications and relationships with planning authorities is invariably helpful as this will align all parties’ understanding of expectations and requirements and what needs to be done to progress them more quickly,” Westerman said. “Developers and contractors want to deliver new projects, and the government needs to find a way to help them do this to meet their own stated new homes targets.”

Project Viability 

A second major challenge is overall viability, Westerman said. There is clear evidence that housebuilders are delaying projects because of the current planning environment.

Around half of homes that were granted planning permission since 2012 remain unbuilt. In four out of five councils, the number of unbuilt homes with planning permission is more than sufficient to meet the government’s housing target for the region.

More broadly, the government’s increase to national insurance contributions has increased the cost of labour, while Section 106 planning rules have delayed the completion of more than 40,000 homes in 2025/2026. 

In the commercial sector, the high cost of construction is compounded by factors such as the growing focus on environmental, social and governance compliance and increases to services charges to cover the rising energy and utility costs. 

Refurbishing secondary commercial assets to meet the high demand for prime office space in cities such as London is also proving challenging, as there is little certainty or confidence in future rental values at present, Westerman said. 

“Developers are looking at wider geographical markets as a result, such as markets in the Midlands and the North that are currently more robust and viable for new development with the potential for a higher return due to price points such as the cost of land,” he said. “There is also an opportunity for niche developments looking at smaller schemes of perhaps 12 or 15 homes rather than the larger-scale schemes.”

Financing Constraints 

Westerman said that while debt finance is still available, the current cost of finance is eroding profit margins.  

“There are plenty of businesses with capital they would rather invest, but the thin margins don’t leave a lot of headroom for a project to make an acceptable return should the cost of debt increase still further,” he said. “As a result, many remain in limbo.”

As part of an assessment over whether a potential scheme is viable, developers should look to the features of the UK’s tax regime that support development and investment, said Liam McKeevor, business tax partner at Buzzacott.

These include obtaining cash flow advantages by ensuring relief under full expensing for qualifying capital expenditure, ensuring interest deductibility restrictions are understood and planned for, and making sure a business makes appropriate VAT and CIS registrations to avoid large tax liabilities. 

“Unusual or large developments could benefit from considering and ensuring research and development tax credits are claimed, where appropriate” McKeevor said. “There are many more, and key to managing UK tax is to plan ahead and take advice early.”

Overall, businesses need to invest time in assessing all of these issues and challenges when considering the viability of proposed schemes, Westerman said. This includes investing in regulatory compliance as part of planning, challenging costs, and considering alternative delivery methods.  

“Most importantly, there needs to be more collaboration between contractors and developers, housebuilders and the government,” he said. “The objectives are already broadly aligned, but we still need to align how to deliver them.”

This article was produced in collaboration between Buzzacott and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.