Looking back at our 2020 Year in Review for the Construction and Property sector, we summarised 2020 as being a year of ‘unprecedented’ challenges and change, with us recommending that operators in the industry have Cash Management as their main priority to allow them to react quickly to any more challenges the industry faced.
Fast forward to the end of 2021, more challenges have been thrown at businesses across the sector, and our prediction around the importance of cash management proved accurate.
Residential and commercial demand
Despite the possibility of more COVID-related restrictions and potential for a further lockdown during 2021, the industry continued to operate strongly with both residential and commercial demand strong, but on the commercial side it had to be the right developments that progressed. Speculative Grade A office developments, once a regular occurrence, have become as rare as a Siberian tiger.
2021 also ushered in a new COVID-created challenge; material shortages. Sourcing building materials became the biggest challenge for the industry that hadn’t been factored into development plans or construction timelines. All construction projects were affected by delays due to shortages of different materials from cement to wood to garage doors and door handles, and so on.
In turn, this sent prices for materials spiraling to unexpected levels which created significant uncertainty and led to many developments having to be rethought. Typical contractual terms also had to change as the existing ‘normal’ industry clauses did not work in practice where building timescales were impossible to achieve without materials, and the material price rises caused fixed price contracts to be unworkable. This in turn caused contracts to have to be renegotiated given the risk of the development falling through without such renegotiation and the possibility of no replacement being available.
In addition, this created unexpected challenges in financing developments. Clients were forced to have challenging discussions with their financers around how to pay for unexpected additional costs that were extremely difficult to quantify given the almost daily increase in price of materials.
This material cost inflation impacted the overall availability of finance for development projects. Finance providers are witnessing projects being undertaken where no assurance on build costs and building timescales can be gained and fixed price contracts are becoming almost impossible to operate.
The consequence of the reduced availability of finance and finance shortfalls having to be plugged is the increase in the number of high cost mezzanine providers willing to accept increased risk in return for additional reward.
For many operators in the industry, the combination of materials inflation, challenges on the availability of finance and contractual risk has caused many proposed developments to be shelved in the short term. Operators are waiting and hoping for some certainty on price, building timescale and materials availability and as a result, 2022 should see many of these projects reignited.
What may lie ahead for the industry for the next 12 months?
Thankfully, looking ahead to 2022 we will likely see an increase in the availability of materials, and a slow down of material inflation. However, it is incredibly unlikely that prices will return to levels seen prior to 2021 demand.
On a more negative note, we expect continued challenges regarding the availability of finance with more projects progressed through expensive Mezzanine Finance options as the continued uncertainty of COVID remains across the industry.
Developers will also need to continue to evolve their building processes as demands for increased sustainability from the public and government will see priorities being placed on reducing carbon footprint, the use of sustainable materials and building ‘eco buildings’.
Unsurprisingly, there will be continued challenges for property on the retail high street, but we have seen increased government and council action to help stimulate redevelopment of surplus retail property, so there should be some exciting developments here.
Looking to corporate residential property developers, planning will need to begin to assess the impact of the Residential Property Development Tax which will apply from 1 April 2022.
In summary, our main message here is the same as what it was this time last year, cash is still a premium and having accurate and timely cash flow information is essential for any developer as we head into another year that carries with it the burdens of previous, and new opportunities that should be prepared for.
If you would like more information or guidance on issues relating to the Construction and Property sector, please contact Derek Gemmell, Head of Construction and Property at AAB.
Find out more about AAB's construction and property team here.