The year 2022 can certainly not be described as uneventful – the highest inflation in 40 years, three prime ministers in two months (one of whom holds the record for the shortest tenure of any British prime minister), budget U-turns, the death of Queen Elizabeth II, the Russian invasion of Ukraine, and the ongoing impact of the coronavirus pandemic.
The property and construction market has not been immune to the impacts of these events, with many experts claiming the year to have been the most challenging since the recession of 2008.
As we look forward to 2023, the indications are that it is likely to be another challenging year for the property and construction sector, as well as for the wider economy. The UK economy is facing its strongest headwinds in over a decade, with a recession looming (if we aren’t already in one), interest rates at 14-year highs (and further rises likely), inflation remaining persistently strong, high energy prices, softening of house prices and continued structural challenges in the labour market.
While the macro environment appears to present many challenges, there are some positive signals in the market. Following the rampant construction cost inflation and material supply challenges that we faced in 2022, the forecast material cost inflation moving through 2023 shows a fall from the heights of 16.0% in June 2022 to a one-month period of contraction of 0.7% in the middle of 2023, then rising modestly through the second half of 2023 and stabilising around 3% at the end of the year. This is more in line with longer-term cost inflation trends. Both the stabilisation and the more normalised rate of growth will be welcomed by contractor and developer alike. A more stable environment should increase contractors’ appetite for competitive tendering, with a significantly reduced risk-pricing element and less reliance on negotiating fluctuation clauses. Combined with a likely reduction in demand for construction services, we should see tender prices start to normalise and possibly reduce, when compared to 2022.
Unlike during the global financial crisis of 2008, general market liquidity remains strong. Funders are generally in strong capital positions, and a number of them even secured additional funding lines during 2022. Although there is likely to be a tightening of underwriting policies, with leverage reducing and pricing increasing, there are still many well capitalised funders in the market with the appetite to deploy capital to best-in-class developers with high-quality developments. This flight to quality will continue to support experienced developers with primary sites.
A key theme to 2023 will be knowing your counterparty. That may mean investing in time to get to know a potential contractor and gain confidence that they have the technical skill and financial strength to successfully deliver your project, or appointing a suitable professional team to advise on the project, or engaging with a funder with committed funds who understands and supports the project’s specific challenges that you are likely to face during the development. The time spent upfront on due diligence will pay dividends during the development cycle.