Helping developer clients to stay ahead of rising costs

With the cost of raw materials continuing to rise, brokers need to help their property developer clients in any way they can to reduce the impact of these increases in order to keep development projects viable.

Related topics:  Blogs,  Specialist Lending
James Bloom | Alternative Bridging Corporation
30th June 2022
James Bloom
"Brokers need to help developers to buy the materials they need for their scheme as quickly as possible in order to be able to secure lower prices"

The price rises make for stark reading. Over the last three months, inflation on the price of materials has increased by between 10% and 15%, according to the Construction Leadership Council (CLC).

It reported that the Ukraine crisis has compounded existing challenges of materials’ supply and prices, caused by the after-effects of Covid-19, escalating global demand, and supply chain disruptions. This has resulted in difficulties in both the availability and cost of many key materials used by the sector, with cost increases of 50% reported recently for some products.

The cost of steel, cement, glass and other energy-intensive products are all expected to rise because of the energy crisis, the CLC noted. In addition, March’s increase in the price of raw materials was the highest in six months.

Meanwhile, the Builders Merchants Federation’s Builder Merchants Building Index (BMBI) has underscored the growing impact of price inflation on the sector and what materials are being affected the most. The value of sales in the first quarter of 2022 was up by +17.7% against Q1 2021. Almost all of this was driven by price increases with volume rising by just +1.5%.

While the figures indicate a continuing demand for building materials, they also confirm price inflation as a critical issue, with the impact of rising energy, fuel and raw material costs on product price clear to see.

Its largest product category, heavy building materials, increased +17.4% by value, but +5.0% by volume. This category includes many energy-intensive products, and bricks, blocks, cement, plasterboard and roofing products all saw their highest quarterly prices to date.

The timber & joinery product category has been even more affected by fluctuating prices over the past 12 months. Year-on-year results show sales value up by +21.4%, with volume down by -11.3%, a price increase of 36.9% over Q1 2021.

Meanwhile, the landscaping category, one of the strongest performers throughout the pandemic, saw a value increase of +14.4% against Q1 2021, with volumes down by -3.5%.

Brokers need to help developers to buy the materials they need for their scheme as quickly as possible in order to be able to secure lower prices, which could make a significant impact on the bottom line of their project.

At Alternative Bridging Corporation, our experience shows that it can take up to three months on a development from drawing down the first finance to starting construction. Looking at the data outlined above and you can see that this could mean a 20-30% increase in prices.

What developers therefore need is access to capital at the start of a project and a number of developers are using our Alternative Overdraft product to achieve this.

The Alternative Overdraft provides a flexible loan facility which can be drawn upon whenever required, offering borrowers the opportunity to draw, repay or reduce funds when they are needed. It negates the need for expensive setting-up charges each time a loan is needed and can be secured by a first or second charge on a residential or commercial property.

It means developers can secure the facility on existing assets, allowing them to rapidly drawdown to pay for raw materials when they start a scheme, paying back the balance on the Alternative Overdraft as construction progresses and further payments on the development finance are released. This enables developers to keep ahead of price increases and manage the project within budget.

Inflation is on everyone’s lips at present as the country faces a number of economic challenges. However, with a strategy to mitigate against material price rises, developer clients can reduce the impact of soaring raw material costs.

 

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