Truth

In this week's blog, we are leaning into some truths that always make for an interesting read: call it an honest health update on the market, a frank look at what's making life difficult for development finance lenders and why pretending otherwise helps nobody! There's a version of this piece that begins with some upbeat line about green shoots and cautious optimism. That's not this piece; this is reality, and how things are improving for smaller homebuilders, but we have to be honest, in the hope that the industry can work together to improve things.

The positives are that developer confidence is ticking upward. Yes, the Bank of England has cut rates comparatively recently, and yes, the government has made all the right noises about planning reform and 1.5 million new homes. But if you're a lender in the development finance space right now, the gap between the headline narrative and the day-to-day reality of deploying capital is significant and widening.

Here's what's actually going on.

The "viability squeeze", as many of our peers will know, is real, and it’s harder than squeezing into that pair of old jeans after two weeks of Easter Eggs. Developers remain caught between high construction costs and capped exit values, and that is the primary operational challenge for anyone putting money into residential development schemes. That's not fringe commentary; that's the view from inside the market and widely accepted as gospel.

While material price inflation has levelled off, tender prices are still forecast to rise by 3.0% in 2026 according to the published data, and factoring that in with a base rate that, even after cuts, is expected to settle around 3.25-3.50%, essentially establishing a higher floor for development finance costs, and then you have a structural problem, not a temporary headache. Our sector is great at overcoming problems, so don’t let that be too alarmist, but we will need to adapt to this.

According to our friends at The Intermediary's findings (82% of respondents), a significant majority of developers say they continue to face obstacles in the current market. High build and labour costs are the most pressing concerns, and when the stats look like that, one sector's pain is another sector's risk to factor in. The ground-up development finance market, in which we primarily circulate, is showing tentative signs of recovery; the numbers are all pointing in the right direction, but it’s become about being selective. This is great for us, as it underpins the due diligence that protects our investors, but it’s a lot harder for volume home builders outside the big 6 homebuilders; deals need to be incredibly well-structured now to meet the criteria of anyone lending in the market.

Here's a problem that doesn't get enough airtime: slow sales rates continue to affect project cash flows and viability, and this is impacting the entire sector. Development finance is repaid when units sell or refinance completes, and when the sales market softens, when buyers pause, when first-time purchasers struggle with affordability, when marketing periods stretch, and the clock keeps ticking on a lender's facility. Exit risk or slower sales was cited as a constraint by 11% of developers in the survey referenced above, but that figure understates the knock-on effect on lenders. An extended sales period doesn't just hurt the developer; it ties up capital, strains loan terms, and forces conversations nobody wants to be having six months post-practical completion.

Finally, the gift that keeps on giving and taking, planning delays. This remains one of the biggest challenges in the market. This is hardly a new observation; it's been the refrain of every market commentary for the better part of a decade. But the reason it keeps being said is that it keeps being true. Planning delays or uncertainty were cited as a constraint by 20% of UK property developers surveyed, second only to build costs. For lenders, risk planning doesn't end once a loan is approved. Extensions, appeals, last-minute conditions, and pre-commencement requirements can reshape a scheme's viability long after heads of terms are signed. The government's planning reforms may yet change this. The new NPPF's brownfield-first approach and the push for higher densities around transport hubs are sensible policies. But policy and practice are very different things; they make uneasy bedfellows and lenders have learned, sometimes expensively, not to price in planning reform until it's actually landed.

So, what's the honest takeaway here? Are we doomed as a sector? No, of course not. The importance of offering an educational yet hopefully light-hearted take on the market is, to be honest, exactly that: to talk about all the challenges we all collectively face. Realism is important when navigating turbulent economies. Lender appetite in our market is incredibly positive; it’s just become more disciplined, and with good competition for well-structured schemes with experienced sponsors, sensible leverage, and strong exits.

Debt funds and private lending now account for 32% of all residential development funding, a significant shift in market dynamics that suggests the mainstream hasn't filled the gap; the problem from decades ago persists. Specialist lenders exist precisely because the mainstream can't or won't serve the full shape of demand. The honest truth about development finance lending right now is this: conditions are better than in 2023, but they are not easy. The lenders who will succeed are those who can apply rigorous underwriting without losing sight of the bigger picture, that the UK genuinely needs more homes, that SME developers are the ones most likely to build them, and that capital deployed well into good-quality schemes is capital that does real, measurable good.

That's not naïve optimism. That's the argument for being in this market at all.

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