Like many businesses, developers have had a challenging year. The huge uncertainties and restrictions caused by Covid-19 have delayed many projects. But time is money and delays mean developers have been unable or slower to turn sites into income-producing assets while still paying preliminaries and spiralling financing costs.
They also face many other risks. For example, those in the residential sector have the devilishly difficult issues around planning and trying to get as many houses on a plot as possible while still making them attractive to anyone larger than a bunny rabbit.
These risks impact not only developers but also lenders, who must ensure they minimise their credit risk. Developments generally fail for one of two reasons: when a developer doesn’t build the right thing in the right place or lacks the skillset to complete a project.
For example, a small scheme of £650,000 five-bedroom houses in the Midlands had two problems – they were family houses with tiny gardens for kids to play in and were surrounded by smaller £300,000 ‘box’ houses, which set a guide price for the area. Unsurprisingly, the developer couldn’t sell the houses, went bust and the receiver could only sell them for around £400,000. It was the wrong product in an inappropriate place.
Also, the developer had decided to build phase 1 at the front of the site. Phase 2 was behind and the only means of access and egress was through the completed phase 1, which severely affected the saleability of the phase 1 houses.
Would this have happened if a suitably experienced project monitor were employed from the outset to challenge the scheme proposal and the build cost of the houses? I’d suggest not, and that they would have picked up these problems before works started. In the event, the programme had to be altered after the contractor had started phase 1. This considerably added to the costs and, crucially, by more than if the programme been more sensible from the start.
At a recent Development Finance Today roundtable, Jason Green, CEO at developer Halsbury Homes, said, “In the project monitoring world, we have much more of a ‘tick box’ approach and more inexperienced people coming to sites to do the monitoring and sometimes the front-end due diligence. It doesn’t make a lot of sense to me.”
What does make sense is using a strong project monitor to act as an independent pair of eyes on a project. One with years of experience – and the grey hairs to prove it – that will help de-risk projects for lenders. Who can spot a builder at risk of going bust or a developer who is building the wrong house in the wrong location or in the wrong phasing sequence. One who will look at a project without rose-tinted glasses and apply their experience to help the borrower when the inevitable problems arise.
A good project monitor is often undervalued and just seen as a cost, but to quote American oil well firefighter Red Adair, “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.”