Shortages of raw materials and manpower can elongate property-backed projects, but responsible platforms should have sufficient procedures in place, explains Nattalie Weeks, head of collections at Kuflink
During the run-up to Brexit there was plenty of doom-mongering about supplies of vital materials being choked off if the UK left the European Union. Since we left, the dire predictions of imminent disaster have failed to come true.
However, in our market, maintaining a healthy balance between supply and demand is being severely affected on the supply side because availability of cement, wood and other building basics is not currently meeting demand. This is not specifically linked to Brexit, but is due to the explosion of house building, renovation and development.
Consequently, this has led to shortages which can elongate project completion times and affect profitability, as scarcity of these raw materials produce price spikes.
You might wonder how that potentially affects you as an investor or would-be investor through P2P platforms that lend money on your behalf for property development or renovation projects.
Simply put, when a property deal is being planned, which might be a full ground up rebuild, a renovation or development project, the developer needs to consider both the increasing costs of raw materials and the concern that they are currently more difficult to source. When a new deal is put to us, it is important therefore that the developer has taken these factors into account.
Without doing so, there is a danger that the project will overrun in terms of time and also be over budget, which will have a direct effect on profitability. As the funder, Kuflink and other platforms like ours have a greater degree of responsibility to you, as investors, to ensure, as much as is possible, that project proposals are realistic and achievable.
A major factor is whether there is a difference between the borrower’s expectations of how much the finished project is worth and the real value, especially when cost estimates in terms of materials and wages have been found to be too optimistic. Valuers have been under extensive pressure due to the sheer volume of work they have been asked to undertake as a result of the explosion in buying activity since the third quarter of last year, partly fuelled by the stamp duty holiday.
Our contacts in the trade keep in touch with us about material shortages, as well as other factors including difficulties in finding and retaining workers. We therefore test new projects extensively.
In the case of existing projects, a handful of our development customers have approached us for term extensions. So far, we haven’t been seeing cost overruns, but time will tell. With new development applications we are building longer terms into our offers and monitoring the need for imposing either lower loans-to-value (to allow headroom should costs overrun) or by building in a comfortable cushion (around 20 per cent) to provide for any contingencies while these issues play out.
Certainly, in the case of Kuflink, there are no causes for concern. We will continue to have plenty of availability for our investors, either on new deals or drawdowns, but we could see loan extensions, especially on development loans. We believe that the procedures we have in place, along with proactive management of all the projects in which we have a stake on your behalf, are sufficient to ensure satisfactory outcomes for borrowers and investors alike.