Property developers and house builders tend to face a tough time in the media. Issues such as land banking, developer profits, build quality, cladding remediation or leasehold and ground rents are all used at times as a political football. With that said, the country needs housebuilders and developers to deliver the housing targets required to meet current shortfall and ongoing demand in the UK.
These businesses, however, are not charities. Most were established with the intention of generating a return for their investors and shareholders, but the reality is that doing so is becoming more ever more challenging.
We saw an interesting article by the Home Builders Federation (HBF) recently about the rising cost of building homes since 2020 and the impact it is having on development viability. The research by HBF suggests that since 2020 the average cost of delivering a home in the UK has increased by £76,000 as a direct result of taxes, levies, regulatory costs, and materials and labour costs due to inflation.
Planning Permission No Longer Guarantees Delivery
Despite government ambitious to increase supply, delivery has also fallen according to Building Control data, with net additional dwellings in 20245/25 down to 208,000 – a 6% decrease from 2023/24, and a 16% decrease on 2019/20.
As a result of declining delivery, planning reform appears to dominate political discussion and with it the assumption that more permissions means more homes. In reality, achieving a planning permission doesn’t address the core issue of viability, so planning reform on its own isn’t the answer. In any event, permissions for new homes have also seen a decline. In 2019, 336,000 homes were granted planning permission. Compare that to 2025 where 221,000 homes were granted planning permission, a 34% decrease.
Add to this the fact that are part of their applications developers are now facing Biodiversity Net Gain (BNG) requirements, Build Safety Levies, Future Homes Standards, nutrient neutrality, and various other regulatory issues, as well as the cost of actually dealing with these new requirements. But, with increasing cost and regulatory pressures the real issue is development viability because even if a site can achieve planning consent, the project may still not be economically viable to deliver.
This is also why accusations of widespread land banking often oversimplify the issue. Developers rare look to acquire land with the intention of generating no return from it. In fact, developers usually seek to generate a return on their capital within a timeframe, for example where internal rate of return (IRR) is used to measure performance of investments over time. No, more often, sites are delayed because their viability, infrastructure, planning or market conditions have changed since the original acquisition and delivering the project would potentially crystalise a loss (or at least not justify the risk to shareholders or investors) if built out.
The Perfect Viability Storm
The development world has changed significantly since 2020. A good scheme with a sensible planning consent might have worked in 2020, but the exact same schemes may no longer be viable in 2026.
Whilst the headline figure of £76,000 from HBF is striking, the more important question perhaps is not the absolute increase, but how these costs compare to house price growth and developer margins over the same period.
According to data from ONS, the average UK new build property price increased from approximately £316,000 in 2020 to around £339,000 in 2025, an increase of around £23,000, or 7.3%. Yet in the same period HBF say that costs of delivery have increased by £76,000.
Building costs have also seen the largest increase on record in the five-year period following 2020. According to HBF, building materials have increased over 40%, adding an additional £28,5000 to cost of building a home, and labour costs have increased by 23%, an average of £8,500 per home. This is supported by BCIS General Building Cost Index which shows increases of 25% to 35% between 2020 and 2025, depending on building type, material and timing.
And, of course, most development projects are not simply about the developer. There are usually landowners, lenders, investors and shareholders involved, all looking for a sufficient return on their investment. We’ll come on to lenders and development finance costs later in this article.
When all these areas intersect, a project that might have achieved a 22% profit on cost in 2020, might now achieve 10-15% in 2025 for the same scheme. The viability challenge is not, therefore, that opportunities no longer exist, but that the margin for error has become much smaller. For 2-3 years of effort and hundreds of thousands, or millions, of pounds of investment, in many cases the risk is no longer worth the return compared to other (less risky) investments.
This is exactly why development appraisals with accurate assumptions have become more important than ever, as small changes to build costs, sales values, finance costs or programme length can significantly impact overall viability. Developers can explore the impact of these variables using our Development Appraisal Calculator.
Biodiversity Net Gain – Another Development Tax?
Since Biodiversity Net Gain (BNG) became mandatory in England in 2024, the complaint we hear most often from developers isn’t about the principle of improving biodiversity (which most developers agree is a good thing) but that the cost, complexity and uncertainty around BNG adds further layers of risk and viability pressures for developers and housebuilders.
Most developments are now required to leave biodiversity in a better state than before development, usually demonstrating a minimum 10% improvement. However, to achieve this in practice, developers need to allocate areas of their site, create habitats, purchase off-site biodiversity units, or buy government credits to achieve BNG requirements. Furthermore, BNG costs often come in higher than originally anticipated, and local authorities frequently take different approaches from one another to BNG implementation.
On its own BNG probably doesn’t stop a scheme from proceeding, however it is another requirement for developers to adhere to which didn’t exist before 2024. Purchasing units or credits, or carving out parts of a site for new habitats which would otherwise be developable area is a direct cost to developers, as well as additional professional fees, and the added administration and time can cause further delays to much needed new housing delivery.
The Future Homes Standard – The Cost of Going Green
The Future Homes Standard is the government’s plan to ensure that new homes produce significantly lower carbon emissions, whilst also being more energy efficient, than previous generations of housing.
The HBF report suggests that £10,200 is being added to the cost of a typical new build home to deliver Future Homes Standards, considering requirements for heat pumps, solar PVs, higher insulation standards, and associated changes to Part L Building Regulations.
Similarly to BNG though, developers we speak to don’t really have an issue with lower carbon emissions and more energy efficient homes – the industry largely accepts this direction of travel. However good policy objectives like this come at a direct cost to developers and are a further squeeze on development viability.
Building Safety Levy – A New Development Tax?
The Building Safety Levy is perhaps one of the more controversial new development costs that developers are now facing. The levy is due to come into force in October 2026, and is intended to help fund the remediation of unsafe buildings following the cladding and fire safety issues that came to light after the Grenfell disaster. According to the HBF report, the levy adds an average of £2,320 per new home, although the impact varies depending on the location and type of development.
Unlike building cost inflation, or planning delays, the levy is a direct additional charge that can’t be easily mitigated away through better procurement, value engineering or tighter programme control. The levy has little connection to the viability of an individual site, so irrespective of how profitable a scheme might be, the scale of the project, where it is located, who the developer is, or what other benefits the scheme might bring to the local area, the levy still applies.
Once again, the industry agrees with the principle, and absolutely wants to deliver safe homes. The ongoing debate in the industry, however, is around whether developers are being asked to contribute twice. The sector has already funded building safety remediation through measures such as the Residential Property Developer Tax, as well as various remediation commitments, for example those identified through the 2022 Building Safety Act requiring building landlords and developers to remedy historical fire-related defects.
Whether or not further contributions via the levy are justified or not is ultimately a matter for policymakers, but from a viability perspective the impact is pretty clear: another cost is added to the delivery of each new home, alongside all the other accumulating new costs.
Planning Delays – A Hidden Cost
While much of the discussion around viability centres on construction costs and regulation change, one of the biggest pressures on developers today is simply time. As we discussed earlier, there is a focus now on planning reform because obtaining planning consent, discharging conditions, securing technical approvals, and progressing developments through new and increasingly more complex regulatory processes (for example Building Safety Regulator approvals where relevant) can add months, and sometimes years, to project delivery.
As we all know, time has a direct financial cost to development. Land acquisition funding, development finance, professional fees and overheads all continue to accrue whilst a project can sit in limbo or be delayed unnecessarily. With the current Bank of England base rate impacting borrowing costs, a typical 3-6 month planning delay to a project will have a far greater impact on viability than the same delay in 2020.
More importantly, delays introduce uncertainty for developers. Developers can usually price known costs into an appraisal fairly accurately, however the unknown is much harder to account for. Not knowing whether a decision with take 3 months or 12 months, whether additional reports will be requested by the local authority, or whether changing policy requirements will emerge during the planning process are extremely challenging to predict. For developers, investors and lenders, uncertainty is often as equal to, if not a greater concern than, cost.
The Development Finance Market Has Changed Too
From 2016 to 2022 the market was somewhat unusual. The Bank of England Base Rate spent most of that period between 0.1% and 0.75% and, as a result, developers became accustomed to exceptionally cheap borrowing, strong leverage, rising property values, strong liquidity, and lenders hungry to get involved in their schemes.
Since then, however, we have largely returned to more ‘normal’ borrowing conditions. Although a rising base rate usually means rising finance pricing, an equally significant challenge is actually now underwriting. Most lenders would rather support a well-capitalised developer with realistic assumptions, than a highly leveraged scheme relying on optimistic sales values. Whilst this has always been true, the sensitivity in the current market is higher. Equity contribution now matters more, as does contingency assumptions, cost planning accuracy, exit strategy and GDV assumptions.
We have seen countless examples historically where mistakes have been covered by rising market conditions. As the market becomes more challenging, however, valuers scrutinise GDV’s in far more detail and lenders consider appraisal assumptions and exit strategy more carefully. Sales rates and market absorption are key factors being considered now, as even profitable schemes can take more time to fully repay the lender – and more time where interest is being accrued and eating away at the developers’ return. Lenders will expect alternative exit routes to have been considered and may look at whether bulk sales or whether rental values can support a refinance onto an investment mortgage.
Development exit finance is a good option in the current market where developers committed to schemes at high rates, but delays and/or dwindling sales values might mean that the completed scheme is taking longer to sell. Furthermore the utilities market is significantly different to 2020, and void holding costs of stock units are a significant burden on completed developments. Development exit finance can reduce the debt cost of a completed scheme once the construction and delivery risk is passed, giving the developer more time to sell units and optimise their return.
Schemes that might have commenced in 2023 and are now approaching completion, or currently selling, may be experiencing a different market to the one they were originally appraised in. The reality is that some developers are experiencing lower GDV’s, slower sales rates and reduced leverage as a result. These are all manageable, but requires a proactive approach from developers.
Why Broker Advice Matters More Than It Did Five Years Ago
The level of scrutiny lenders now apply to development projects is one of the biggest challenges in the development finance market since 2020, not necessarily whether funding is available or not. There remains a decent range of banks, challenger banks, specialist lenders and private funders all actively interested in lending against development, from ground-up development finance through to commercial development finance. The market has simply become more nuanced.
As discussed above, lenders are placing a greater emphasis on developer experience, the developers equity contribution, contingency allowances, build cost assumptions, the professional team and, possibly most importantly, the credibility of the exit strategy and GDV. As the market slows, or in some areas declines, lenders and valuers are understandably taking a more cautious view of the exit values than they otherwise might have during periods of sustained house price growth. Developers are now increasingly finding that the assumptions in their appraisals, and the supporting information and documentation in their development finance applications, have become just as important as the quality of the site itself.
As viability and cashflows have tightened, the structure of development facilities is also coming into sharper focus for developers. Developer decisions around retained interest vs rolled-up interest, contingency provisions, development exit strategies and timing, and overall leverage can all have a meaningful impact on profitability. And, with development programmes now often taking several years from initial land acquisition through to final plot sales, small changes made at the outset can have a material effect on the end outcome of a project.
As we touched on earlier, many developers are also increasingly considering development exit finance, sometimes even as part of their primary funding strategy rather than a contingency plan only when needed. The very real risks to developers such as delays in planning, utility connections, construction delays, or sluggish sales can all extend the project timescales beyond the developers original expectations. Development exit facilities can provide the developer with some additional breathing space and reduce their borrowing costs once construction is complete. This helps them to focus on a more controlled sales process where values can be maximised, rather than forcing them into unnecessary discounting.
Five years ago when borrowing costs were exceptionally low, property values were rising and lender appetite was strong. Many developers could achieve a profitable outcome with a relatively straightforward (or even non-optimum) funding solution. But today’s market is different and development finance is no longer just about finding the lender offering the highest LTV/LTC, or the lowest interest rate. Projects now are increasingly benefitting from being matched to the right lender, stress-testing assumptions early, structuring facilities appropriately for the project, and ensuring that viable exit strategies are fully considered before construction starts.
Experienced development finance brokers can often add significantly more value now than they might have done a few years ago. Brokers with a genuine, real life, understanding of development appraisals, planning, construction programmes, lender requirements, and new homes sales are often able to identify risks, opportunities or alternative solutions that may not be immediately obvious. We are now in a market where margins are tighter, lenders are more selective, sales rates are slowing and prices are no longer growing – good advice can be just as important as securing the funding itself.
Summary – Development Finance In A More Demanding Market
Development opportunities themselves have not disappeared and opportunities still exist. The UK continues to face a significant housing shortage and demand for new homes remains strong in many areas across the country. However, both central and local government continues to look to the private sector to deliver much of the hosing required over the coming decades.
The challenge in today’s market is that the economics of development and house building have fundamentally changed. Build costs, regulatory requirements, planning obligations, borrowing costs and delivery risk have all increased. At the same time, sales values have not always risen at the same rate. Sites are not failing to come forward because of lack of demand, or because developers lack appetite to build – developers are simply finding that the level of risk required is no longer adequately rewarded by the returns they are able to generate.
History suggests that the market eventually adjusts. Land values can correct, planning reforms can improve certainty, infrastructure constraints can be addressed by large-scale investment, and lenders continue to evolve their products and appetite to lend. Developers and housebuilders are also highly adaptable themselves, and have consistently found ways to navigate regulatory changes and economic cycles.
The key for developers, investors and landowners is understanding how these changes affect viability, funding and delivery of a project. More so than ever, successful projects require realistic appraisals (try our development finance and appraisal calculator), sensible contingencies, robust exit strategies and funding packages that reflect the realities of the market we are in today.
At Adler Green, we work with developers and investors across a range of projects including property development, commercial development, heavy refurbishments, commercial to residential conversions, land purchase and development exits. Unlike many finance brokers, our experience extends directly in to real development, property investment and new homes (rather than just arranging funding). Understanding development viability and pressures from a developers perspective allows us to support projects throughout the development life cycle and help our clients navigate an increasingly complex market.
