.Will build costs rise in 2021?

A big question for property developers is are build costs going to rise in 2021?

Depending on your profit margin a deal that stacks up now may no longer work if there is a significant rise in build costs

So lets take a look at this and the factors that may affect them


Influencing Factors


Damage to the economy

Government stimulus packages

Government Recovery Strategy

Market Forces


Housing Market

Financial Liquidity


Material costs

The main area of concern is the outcome of the Brexit negotiations

If we emerge with a no deal the danger is the backlog of imports at the Channel ports. This will interrupt  the supply chain

Everyone remembers what happened at the start of the first lockdown. It became nearly impossible to find routine materials such as plaster and cement.

Many smaller firms have been prudently stockpiling materials throughout the year to prevent this happening again

As soon as the people voted to leave the EU after the referendum in 2016 a similar situation occurred

Crossrail in London was just starting the fit out stage. The main contractors involved in it had massive purchasing power and stockpiled hundreds of millions of pounds worth of materials to ensure they suffered no shortages.

This filtered down to smaller wholesalers who increased prices. We must be realistic and expect wholesalers to increase prices in the event of a no deal Brexit even if they are not experiencing any disruption as its just too good an opportunity to miss and when people complain they can just use that as an excuse

Work on HS2 has now started but these are still at the Civils and enabling stages. The demand for the materials used on these will primarily be concrete , steel and shuttering timber therefore should have no effect on materials used in property development

At first glance the Governments recovery strategy of “ Build, Build, Build” would make you think that there are going to be tens of thousands of houses springing up everywhere. But for that to happen you need tens of thousands of people to be able to get mortgages. At the moment there are hundreds of thousands of people who have lost their jobs and this is predicted to rise to several million over the next 18 months

Also upon closer inspection it is revealed that 90% of the money allocated to “ Build, Build, Build” was already allocated in previous spending plans. So we aren’t suddenly going to see lots of brand new hospitals and bridges springing up everywhere


Labour Costs

This is an area that needs detailed examination as there are many factors affecting it

Before we look at any other factors we must first look at market forces

To say the UK construction industry has had a longstanding love of cheap labour is being polite. It would be more accurate to say that it is addicted to it. For the past several hundred years it was the Irish who satiated this need. These days it is rare to find an Irish worker on a building site and when you do they are usually an Engineer or Manager

At the start of the 21st century it was the East Europeans who took up the slack. The only problem is after a few years they put down roots and expected to be paid the going rate

This problem was solved by constantly expanding the EU and bringing in the next wave of cheap labour from the new accession countries

Lets be clear the EU was never about free movement of labour. It was about the free movement of cheap labour from poor countries to rich ones

So how will construction companies keep their profits up without increasing wages?

During the first lockdown the construction industry was allowed to stay open. On many sites wage rates were cut almost immediately by 15-20%. Even though the operation of the sites were unaffected the employers used this as an excuse to cut wages

There is also a big change in taxation coming into effect in the next tax year that will affect construction workers which is called IR35

Many construction workers and Managers are paid through Limited Companies

With expenses they can expect to pay 20% tax or below

So to give an example a tradesman on a major project earning £2000 per week could expect to take home £1700 . If he falls inside the IR35 classification he can expect to take home £1100

These skilled workers are not going to accept what is in effect a massive pay cut. Many of them in the late stages of their working life will just decide to retire early or look for well paid work abroad while others will set up their own companies but will no longer be classed as being in the workforce. This will hit highly paid Managers, Engineers, Planners, Architects etc even worse


This coincides with the Governments seemingly insane destruction of the economy in the name of protecting us from a virus with a relatively low mortality rate

Whole sectors have been devastated,including retail, leisure, hospitality and the arts. Several million jobs will eventually be lost as a result of this. So far they have managed to deflect anger for this by artificially keeping unemployment figures down with furlough payments

They have already announced a retraining programme to reskill people and get them back into work. Construction trades is one of the sectors where new skills will be taught

Every single Government from the recessions in the 80’s onwards has had retraining in construction skills as one of its main solutions in reducing unemployment figures. The only problem with this as everyone who has been involved in the industry since the 80’s will remember is that these retraining schemes don’t produce skilled tradesmen. They just produce semi-skilled cheap labour. Cast your minds back to the YOP and YTS schemes


Every recession also sees a new wave of workers who have lost their job and think now is the time to have a go on their own. They may not necessarily have a trade but they are a bit handy at a few things such as roofing/plastering/painting. And they decide they have nothing to lose by getting a van, a few tools and advertising themselves as general builders. They are happy to have a go at anything that comes their way. And they wont be charging top rates and will just be happy for what they can get

Now we can see where the construction industry will get its cheap workers from

All this is happening at the time we Leave the EU. There will be restrictions on foreign workers coming to the UK. The Home Secretary has already announced that she will allow a special exemption for bricklayers. This is a trade that has been identified as having a particular shortage. It is not unreasonable to assume that she will eventually create new exemptions for every category of tradesmen

So where does that leave us as property developers? It leaves us with a shortage of skilled tradesmen and an abundance of semi-skilled labour

Any tradesman/builder currently involved in property development with a good reputation will have no need to drop their rates at the moment. Any good tradesman involved in the industrial sector who has left to form their own company due to IR35 will not immediately look to move into the residential sector as that is traditionally looked down upon as the lowest end of the industry.

What we will see however are the semiskilled moving into the residential sector. These people will not be able to get jobs on major sites or HS2

Lets take the example of a painter being on £200 a day in London. Somebody who was on £40 a shift working in a pub who has lost their job and done a 6 month Government retraining course in painting and decorating will get laughed off site if they tried to get a job on a major construction site. However tell them that they can get £100 a day working on a property development and they will jump at the chance. Now the qualified painter who is working there already isn’t going to like it but that’s just economics

Every recession is the same. It’s a race to the bottom where contractors compete based not on who can produce the best quality but who can do it the cheapest. We can expect contractors to employ cheap labour but initially keep their prices at the same level and gradually lower them as they are undercut by others


We must now consider the effects of the Governments stimulus packages, Financial liquidity and Housing market. It makes sense to look at these together as they are so closely entwined. No one can accurately predict if the housing market will continue to rise or plateau and fall. The main variable affecting this is the Stamp duty holiday. Will it be extended  or will stamp duty be reinstated? Nobody knows

The Government stimulus packages have injected billions of pounds into the economy via Cbils and Bounce back loans. A lot of that money is sloshing around looking for a home

There is a large amount of liquidity in the form of Institutional money such as pension funds, Hedge funds and private investors looking for somewhere safe to invest their money, and property is always a safe bet. However deals that have high build costs are not so attractive. With uncertainty about the direction of the housing market, a developer who has a deal that no longer stacks up  must make savings for the deal to attract investment. If material costs are out of their hands the only other option is to reduce labour costs


So to conclude we can see a possible rise in material costs in the short term with them leveling out over the mid to long term. And labour costs stable for the short to mid term but dropping over the long term



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