Developers Feel The Pain As Perfect Storm Of Problems Squeezes Business Model

Property development is never easy. It’s a long, complicated, risky process.

And right now, running a development business has never been harder. 

“This has been the most complicated year of my career,” General Projects CEO and founder Jacob Loftus said of a working life spanning more than 15 years. “That’s what keeps the brain ticking over.”

A combination of rising costs, declining values, reduced risk appetite from investors and lenders, and increasing regulation has caused a huge drop-off in new development in the UK, making life precarious for small and midsized developers. 

Northacre, one of the UK’s best-known residential developers, said earlier this year it was entering a “dormant phase” because it didn’t have any new projects to work on.

And the European arm of U.S. student and rented residential developer and operator CA Ventures went into liquidation earlier this year when PGIM pulled out of a deal to fund its development pipeline and the contractor on schemes it had under construction went bust. The cost of those projects spiralled by £40M to £50M, it said in a letter to investors, some of which it had to bear, helping push it to the wall. 

Developers might not attract much sympathy. Numerous British Property Federation surveys show a lack of trust in the real estate sector from the British public. 

But the sector's malaise means that the homes, student accommodation schemes and senior living facilities the country needs to solve the housing crisis aren’t getting built. And the conversion of old, carbon-intensive commercial buildings into greener assets isn’t happening. 

That has developers pivoting business models and honing their skills to stay relevant, remain solvent and carry on building in an environment where things are starting to get easier, albeit slowly.

Data from different sectors highlights the stark pullback in development over the past two or three years. 

In the London office world, new construction starts fell 42% between summer and winter, according to Deloitte’s Crane Survey. Office refurbishments, a key pillar of making offices greener, dropped 57%.

When it comes to build-to-rent, the number of new homes under construction dropped 20% year-on-year in Q3, according to BPF and Savills data. Build-for-sale new starts were down 60% in the UK in Q2 compared to the same period in 2023, though Q2 2023 saw a very high number of starts.  

“I think there are just lots of complicated factors at play, which mean everything is so squeezed at the moment that the risk line in your appraisal is now screaming red at you, and it makes it much harder to convince people to take that risk and spend the money,” Vesta Group CEO and Founding Director Emma Prichard-Selby said.

The company develops residential and commercial schemes in London and the UK regions. 

Interest rates have spiked since autumn 2022, with a twin impact: Increases upped the cost of both debt and equity for developers without large balance sheets to utilise, making financing schemes more expensive. At the same time, they lessened the likely end value of any new development, making it even harder for developers to achieve the numbers for a project to stack up. 

“There isn't actually any money out there. Too much of 2024 was a distraction, conversations with people who would love to deploy money in the sector but don’t have any,” said Honor Barratt, CEO of Birchgrove, which builds senior living schemes for rent. 

“So all I can do in 2025 is run the most amazing, best-in-breed, market-leading business, so when the money comes back to the market, I'm in prime position to take it.”

On top of the elevated cost of finance, the costs of construction materials and labour continued to rise in 2024. The pace of increase was about 25% to 50% less than in 2023, but costs still went up, according to the Office for National Statistics. 

Gaining planning consent has also become increasingly difficult in recent years, another roadblock to providing affordable housing and making schemes stack financially.

The new Labour government has made speeding up the planning process a central pillar of attempts to stimulate economic growth.

Yet with planning permission for large schemes regularly costing more than £1M with no guarantee of success, funders of projects are becoming ever more risk-averse. 

“Right now there has to be so much fat in a deal for it to be worth spending the money bringing it forward,” Prichard-Selby said.

Re:shape founding partner Jermaine Browne said recent tightening of building safety regulations is having unintended consequences for developers. The need for a residential scheme to clear several design “gateways” before it can be built and occupied — even after planning has been achieved — stretches out the time between conception and completion. 

Investors and lenders are often reluctant to fund a scheme until all the gateway phases have been completed, meaning that developers need to find extra capital to bring a project forward. 

“The existence of the gateways is very important, and it's not something that should be circumvented,” Browne said. “But the process that exists in relation to needing Stage 3 design [permission] before we can get a build contract means companies like us, who are SMEs, it will cost us anything from £1M to £2M in addition, and it adds an extra six months onto our program.”

Even so, developers are finding ways to make schemes work and businesses viable. 

“We’re being nimble,” General Projects’ Loftus said.

General Projects, founded eight years ago, started out in office development, but it is working on two aparthotel projects in Shoreditch, east London, as well as taking on mixed-use projects that are led by residential rather than office. 

It is also working with local authorities and traditional private sector funding partners, and it has set up its own flexible office platform to bring in regular income from operating assets as well as developing them. 

On the flip side of diversifying, others are getting incredibly specific in sectors with apparent long-term demographic support. 

“We are seeing foreign direct investment counterparties wanting to see specialisation much more than they've ever done before,” Amro Partners co-founder and President Ami Kotecha said. 

Amro Partners specialises in student and BTR development, with projects across the UK and in continental Europe. But funding partners are increasingly interested in homing in on one geographic location and the management efficiencies that can bring. 

To succeed, Amro has become more granular in the data it collects about locations, who will rent its schemes, and managing the development process itself, Kotecha said. Members of the team are on-site with contractors weekly, if not daily, to have oversight into how a scheme's schedule and cost are progressing and to be able to report that back to funding partners. 

“We’re not an easy counterpart to deal with. We’re not an arm’s-length developer,” she said. 

People go into the development profession because, when it goes right, there’s money to be made, and plenty of it. But in a lot of cases, there’s more to it than just profit. 

The tangible nature of real estate and development was a regular refrain from those Bisnow interviewed, with Kotecha and Prichard-Selby both mentioning their love of influencing a city's built environment.

Having grown up in Oldham, north-west England, Re:shape’s Browne said seeing the impact regeneration projects had on improving the lives of friends and family made him want to go into the profession.

For Birchgrove’s Barratt, development is a means to an end. Her interest lies in improving the lives of older people.

“Developer isn’t necessarily something I’d put on my passport,” she said. 

2025 should be better than 2024. Interest rates are coming down, valuations are stabilising and so are cost increases. In the office world, occupiers are increasingly willing to make decisions, which means leasing is increasing, prompting developments and refurbishments. 

But the complexity and challenges of being a developer will remain. 

“Now I look back to December 2021 and I think, ‘Oh, my God, all we had to deal with was Covid,’” Barratt said. 

“Now we've got all this other stuff, so it's like, is this our new normal? And the only ones who will thrive are the ones who can live a slightly adrenalised, seat-of-your-pants kind of life and make hay out of it.”