As originally published in Specialist Finance Introducer
Ongoing property price inflation and growing rental demand mean that refurbishment projects continue to present a good opportunity for investors. However, there are also obstacles in the current environment, with plenty of anecdotal evidence of building projects stretching beyond their original budgets and timelines due to an increase in demand for builders, and shortages of/increases in the price of construction materials.
The evidence isn’t only anecdotal. The Monthly Statistics of Building Materials and Components published by the Department for Business, Energy & Industrial Strategy has confirmed that between May 2020 and May 2021, there has been a 10.2% increase in all building work, including a 10.8% increase in the construction of new housing. This increased demand has combined with some limitations in supply to drive up the cost of some construction materials. According to the report, the biggest annual change has been to the price of concrete reinforcing bars, which have increased by nearly 43% in the last year, while fabricated structural steel has risen by more than 38% and the cost of imported plywood has gone up by almost 30%.
These are significant price increases that could easily erode any contingency budget, so it’s important that your clients go into their next refurbishment project with their eyes open and a plan to overcome any extra costs that are out of their control.
One way of increasing the available budget for a refurbishment project, of course, is by borrowing more at the outset, so that there is extra margin to meet any unexpected outgoings. How much your clients choose to borrow will depend on their appetite for leverage and their deposit, buy if they are looking for greater leverage there are ways to secure that even based on the same deposit.
When it comes to refurbishment projects, some lenders will base the maximum LTV to which they lend on the purchase price of the property prior to the renovations. Other lenders like Castle Trust Bank, however, are able to base the LTV on the price the property is likely to achieve once the refurbishment has been completed. This could mean that an investor is able to borrow more at the outset, which may give them enough of a contingency to ensure they can meet the rising costs of a refurbishment and successfully complete the project without any unnecessary hold ups.
So, if your clients are concerned about the rising costs of construction, look into ways you could secure them a greater contingency and provide them with greater confidence for their refurb projects.
Barry Searle, Managing Director of Property at Castle Trust Bank