Experienced Partners

In this week's blog, we start as we often do with a question, one that a lot of our clients have been pondering, and perhaps one where many may not like the answer. With inflation rising and rate increases on the cards, how far theoretically could the Iran war push up UK Homebuilding costs, and what will the long-term impact of this situation look like? The honest answer? Likely further than priced in.

On 28 February 2026, US and Israeli forces struck Iran. Within days, oil was trading above $100 a barrel, liquefied natural gas had nearly doubled, and aluminium had hit a four-year high after Iranian strikes disrupted shipments from smelters in Qatar and Bahrain. For most industries, these were troubling macroeconomic numbers to digest over a morning coffee. For residential property developers in the UK, they were a direct hit to projects' P&L when you're looking at crystallising those profits in 18-2 months' time.  Several months on, the question isn't whether the Iran war is pushing up UK homebuilding costs; the question is how far, through which channels, and for how long, and how do clients work with experts to mitigate and plan for these changes?

Construction is not one industry, essentially It's a chain of interdependencies, and energy costs touch every link. Let's start with the factory for the sake of the example at the factory. Brick kilns, cement plants, and glass factories are energy-intensive UK manufacturers that felt the first surge in gas prices immediately. Those costs don't stay at the factory gate; they move into tender prices, into build costs, into the project appraisal that a developer submitted six months ago and is now trying to honour. Chemical and steel manufacturers across the UK and EU have already imposed surcharges of up to 30% to offset surging electricity and feedstock costs.

Then there's the China channel, which is less discussed but arguably more significant for residential developers. The UK imports most of its products from China, and China purchases 90% of Iran's oil. As a result, Chinese manufacturing costs have soared, and UK importers of Chinese-made products, including lighting and electronics, are now facing higher costs due to supply chain disruptions. For a housebuilder fitting out multiple units, that's kitchens, bathrooms, heating controls, and electrical fittings all repricing simultaneously.

The materials story would be painful enough on its own. But the Iran war has a second, equally consequential effect on housebuilding economics: it has completely changed the outlook for interest rates. Prior to the conflict, CPI inflation was expected to fall from 3.0% at the beginning of 2026 to 2% from April, and to remain there for the rest of the year. The Bank of England now estimates CPI is likely to be between 3% and 3.5% in the second and third quarters of 2026 due to higher energy prices. Rate cuts, which the development finance market had been anticipating and partially pricing in, have evaporated. Financial markets no longer expect the MPC to cut rates in 2026. Rate hikes are now considered possible.

For developers using development finance, this matters enormously. Interest is charged on drawn funds across the build period. If that build period extends because materials are delayed, contractors reprice mid-programme, or supply chain disruption pushes back completion, the interest clock keeps running. Major UK housebuilders are already issuing stark warnings that the war's economic fallout will push them into a debt crunch due to eroding profit margins. Mid-sized contractors are under similar pressure, having bid for jobs at 2025 prices and now unable to easily pass on the difference. So what does this mean for SME developers?

The large housebuilders have procurement scale, hedging strategies, and balance sheets that absorb shocks badly, but survivably. SME developers have none of those buffers. They buy materials at market prices, rely on subcontractors who are themselves under margin pressure, and fund schemes through development finance priced and structured at the point of drawdown. The practical implication is not to stop building. Demand hasn't gone anywhere. The housing shortage remains structural, and the government's 1.5 million home target hasn't been quietly shelved. But it does mean that project appraisals completed before 28 February need revisiting, contingency assumptions need stress-testing, and the choice of finance partner matters more, not less, in volatile conditions. A lender partner who understands development, who structures drawdowns against build progress, who provides certainty of funding rather than discretionary review, and who has seen construction cost cycles before, is not the same as a generalist bank that will withdraw at the first sign of margin compression. In an environment where there is a "consensus forming across developers to wait it out," the developers who move with the right capital structure will be the ones who complete, sell, and repeat.

So what are we saying here?

It’s about finding experienced partners who understand the changing nature of the environment. The base case is far from catastrophic; it's a sustained squeeze on margins and starts, but the developers who will navigate this best are not the ones waiting for certainty, because certainty isn't coming. They're the ones who have stress-tested their numbers, locked in their finances, and built relationships with lending platforms like ours that won't blink.

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