Viability of projects under threat as construction costs rocket

The viability of schemes across Birmingham are being affected by construction costs as developers battle construction inflation and static values.

In the wake of Carillion’s collapse, the problems being faced throughout the supply chain and the squeeze on margins have come to the fore.

Senior figures from Birmingham’s property sector gathered at a round table event hosted by MHA MacIntrye Hudson to discuss whether the city was in danger of overheating.

“One of the big attractors for Birmingham at the moment is affordability,” said Rob Groves from Argent.

“Construction inflation has rocketed over the last four or five years in the region – quite sharply, compared to London. The reality is values haven’t.

“Whether it’s commercial, residential they have got better, but we need construction inflation to calm down. We need values to go up but sustainably – it’s just steady as we go.”

Rob Groves

Hortons’ Estate’s property director Richard Norgrove was also focused on viability and construction costs.

He said: “We’re not seeing any costs coming down at the moment – and obviously you need rent, and someone to pay the rent, to justify the investment – and one of things we’re noticing is occupier demand is weak.

“There were some headline deals last year, PwC, for example, HSBC and HMRC. But you take those out and it’s very thin. We’re not seeing rents go up, but we’re seeing incentives increase as well.”

Viability is “a big concern” for Chris Keogh, managing director of Court Collaborations, which is focused on the residential sector.

He said: “I spend a lot of time sat in front of appraisals figuring out where we are going to get the correct level of margin when construction costs are going up, when we are being told they will be potentially be leasehold reform on flats. So do I include a ground rent valuation within my appraisal, or do I not? That takes a couple of million quid out of there.

“We look at things like CIL, which is construction inflation linked, that’s gone from £72 per metre squared to £80 per metre squared in a year.

“Of course it can be offset by section 106s and negotiating through those, but everything seems be inflating apart from the headline figure, which is the one that’s not increasing the most.”

Richard Norgrove

“I’m quite positive with the Midlands,” said Robin Nordstrom from Apsley House Capital. “We are investing about £700m in Birmingham, mainly due to the fact we truly believe in it. The journey that Birmingham will take in the upcoming 7 years.

“I think a value increase of maybe 20%, mainly in residential, will actually help Birmingham to regenerate. Currently most areas in Birmingham are actually unviable to build anything, no matter what you really build to a certain extent.

We have started the journey in the city centre, then I’m sure that will expand to the suburban areas.”