The new build and development sector: Key drivers and threats

There are several key issues within the new build sector which will help shape its commercial viability and capacity over the coming short and long term.

Here, we analyse those in a bit of detail:

Key threats to viability within the sector

The profitability and speed of development are some of the key challenges in the sector at present. There are several factors that are contributing to this:

• Elevated construction costs: A primary threat remains the high and volatile cost of building materials and labour, which directly impacts development margins.

• Financing: Developers are facing increased scrutiny from lenders who often require a substantial minimum profit margin (e.g., 20%). Given the current stability or in some areas low to no growth of house prices recently, achieving these margins is proving difficult and sometimes can make entire projects unviable.

• Reduced appetite for Affordable Housing commitments: There are continued challenges in the Registered Provider (RP) sector, leading to reduced appetite from providers for Section 106 housing stock. This creates a bottleneck, as many developers rely on RPs to purchase committed affordable units to de-risk and help finance their open-market sales. The expectation is that this position might improve moving through 2026 with the £39B fund announced by central Government starting to take effect, which should boost RPs purchasing power.

• Absence of direct purchase stimulus: Another factor impacting sales rates is the lack of a direct stimulus package to replace Help to Buy (HTB). HTB effectively brought forward demand and underpinned buyer affordability, especially for first-time buyers. Without a comparable mechanism, developers are forced to use their own margin (via incentives like stamp duty payments) to create demand, which further erodes profitability.

• Regulatory environment: Delays in obtaining planning permission continue to slow down the housing pipeline. Furthermore, the financial burden of Community Infrastructure Levy (CIL) payments and the introduction of Biodiversity Net Gain (BNG) costs are significantly impacting project economics and potentially reducing the number of viable units. These obstacles are further compounded by other key regulatory and infrastructure challenges, including: - Nutrient neutrality: This planning requirement in around 70 local authorities across England involves expensive and complex mitigation measures. - Water and drainage infrastructure: We have seen major issues arise recently with new water supplies, and foul drainage infrastructure in other locations. - Power supply competition: Power is an issue in some areas, with housing providers having to compete with large energy users like data centres.

• Market slowdown: The slow-down in the new build residential sales market over the last 24 months has forced developers to absorb costs through buyer incentives. Paying the cost of stamp duty on a residence to incentivise and stimulate a sale does often work but it comes at a cost to the developer as it again further erodes profit margins.

Key opportunities and drivers of change

Despite the threats, several positive forces are working to stimulate and stabilise the market and offer opportunities for growth:

• Risk mitigation through Joint Ventures: The use of joint ventures between developers, funders and builders is an increasingly important strategy for sharing financial risk. This helps optimise resources and enhances project resilience in an otherwise uncertain environment.

• Local Authority Partnerships: Strong support from and collaboration with local authorities (such as the Cambridge Investment Partnership / Hill model) can de-risk projects, streamline land assembly, and ensure schemes align with local housing and infrastructure goals.

• Demand for sustainability: The strong and growing want and need for more energy-efficient housing provides a clear market advantage for developers who prioritise sustainable building practices and higher EPC-rated properties. Importantly, this also helps by giving new builds an advantage over the second-hand market.

• Sustained demand and pipeline activity: A fundamentally positive signal is the continuing flow of residential development opportunities reaching the market, indicating underlying faith in long-term demand. The success of new schemes planned for the coming year, particularly those backed by strategic marketing, appropriate pricing, and tailored approaches, is expected to help steer the market in a positive direction.