24th January 2024
Upfront due diligence ensures better risk management for BTR schemes

Article originally published by CoStar, available to view online here
By Will Ashton, Senior Surveyor at Rund 

The past few years have brought numerous economic and geopolitical instabilities. Factors including inflation, interest rates hitting a 15-year peak, wildly surging energy prices, labour shortages and supply chain issues have driven higher construction costs and reduced programme certainty. In addition, the real estate industry must contend with a higher cost of debt financing, not to mention increasingly stringent planning and regulatory requirements.

Real estate development has certainly felt this impact and, according to the RICS UK Construction Monitor, construction workloads in the UK have fallen into negative territory. Financial concerns are understandably top of mind, especially when last year alone saw 4,165 construction firms entering administration (nearly a fifth of all insolvencies).

Consequently, developers and investors are growing much more cautious, seeking reassurance and more effective ways to tackle the higher number of risk factors now affecting the industry. In a bid to future-proof their developments they are looking to tackle construction related risk factors from the outset and increase certainty of the quality of the end product in order to minimise costs over the asset’s lifespan. 

Current macro and market dynamics underscore the vital importance of due diligence and we are seeing this move much earlier in the process in the Build to Rent (BTR) sector, with a noticeable evolution beyond being just a ‘checks and balances’ step. Knight Frank’s Q3 2023 BTR report shows that last quarter’s transaction volumes were 57% lower than Q3 2022 and, overall, year-to-date investment volumes (£2.7 billion) are 22% below the levels for the same period last year. Granted, BTR has proven to be impressively resilient against the backdrop of wider industry challenges, as reiterated in Rund’s 2023 BTR research report. We found that rising rents (which shot up by 8.4% in September alone), caused by the persistent demand and supply imbalance of homes, have been one of the key drivers of construction. At the same time, activity has been impacted by cash constraints and general construction slowdowns. Nevertheless, appetite, and the pressing need to complete more projects, remain strong, even if total investment levels decreased year-on-year. 

As risk-averse developers and investors try to ascertain project viability more accurately, they are also facing higher debt financing costs and lower yields, placing deal structures under added pressure. All of this can delay funding decisions and starts to much-needed schemes. It’s imperative to find efficient ways of managing projects from the earliest stages to navigate all the potential bottlenecks successfully. Undertaking rigorous due diligence prior to signing agreements plays a crucial role. It allows for thorough risk identification, quantification and mitigation to ensure that clients are informed of the potential cost, programme and quality risks, prior to making decisions as to whether to acquire sites or proceed with schemes. 

There is only upside to this approach, providing transparency across the entire lifespan of a scheme and empowering developers to take on substantial projects with confidence. For instance, our team worked on Grainger plc’s major BTR development on Queen’s Road in Nottingham City Centre, The Barnum, providing technical due diligence and acting as employers agent, quantity surveyor and project monitor. This significant 348-home development in the city centre required meticulous planning and, by assessing a wide variety of risk factors such as financial, technical and quality control, the project proceeded smoothly. It was recently completed, providing much-needed, new high quality rental homes and supporting regeneration. Similarly, we supported on delivery of a significant BTR scheme in Newcastle for a leading developer. Located between the Quayside and city centre, the building was acquired as a stabilised asset (increasingly popular with BTR investors due to the certainty of generating immediate rental income) and we were called to undertake in-depth technical due diligence, building surveying and Clerk of Works services to support the client’s decision-making process regarding the development opportunity.

Placing in-depth due diligence front and centre brings manifold advantages. It is the smart, constructive and proactive strategy in the present climate to identify and manage risk early, gain a more accurate and comprehensive view of developments and enable seamless delivery to deadline and budget. 

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