Affordable Real Estate Development in an Inflationary Environment
At face value, investment in real estate may appear to be very lucrative in an inflationary environment – as property and rental values are pushed up.
However, there are a number of downsides to real estate as an asset. Its illiquidity and its reliance on other sectors that are themselves subject to inflation are just some of the challenges faced by property investors and developers.
What’s more, the construction industry has itself been hit with rising costs and a major shortage in materials in current times. As a result, this area of real estate development is moving slowly – adding to the environment of unfulfilled demand.
It can be easy to operate at a loss during times of inflation, as the cost of development and construction will continue to rise and rise, overtaking the prices that clients are willing and able to pay.
Because of this, it is important for developers and investors to have plans in place to avoid falling foul of this problem.
In this article, we explore a few ways in which developers can keep their costs down during these testing times and continue to make a profit.
Pursue Smaller-Scale Developments
Reducing the square footage or height of a planned property – or both – will naturally help to chip away at the cost of construction. Fewer materials will be needed, so you may be able to keep your material expenditure down by adopting this approach.
Of course, it is vital that the resulting building remains desirable and fit for purpose. The best approach is to calculate the degree to which size can be reduced before comfort and user-friendliness begins to be impeded.
It’s also wise to think about what you’re actually paying for the property or land as that has a huge impact on the overall outcome of the development. Acquiring through auctions is a good first step here.
Drop Some Features
Another approach is to take stock of the features and fittings that are planned for a particular project to find aspects that could be dropped without any loss of functionality or attractiveness.
Perhaps there are a few superfluous luxury touches that are not required for the building to serve its specific purpose.
Naturally, it’s a shame to lose certain signature touch or desirable selling points, but, on balance, this may be the most sensible approach if you wish to turn a profit.
Change Up Construction Materials and Methods
Conduct research into alternative materials you could use in place of those that have been worst affected by inflation or shortages.
Talk to firms that specialize in concrete alternatives, reinforcement methods, timber supply and so on in order to track down the most affordable and readily available materials. Of course, you must take care to avoid any major reduction in quality or functionality when making purchases.
Another great approach is to cut down on imported materials. This may mean that you’ll be able to save on shipping costs and waiting time. It’s also a great way to support local tradespeople and do your part for the environment.
Finally, consider reusing or recycling existing materials. This is another wonderfully sustainable approach and will likely reduce the time and money spent on acquiring newly produced items.
A Note On Pre-Sold and Off-Plan Developments
The above adjustments are naturally easier to pursue if you are not working on a development on behalf of an existing client, buyer or stakeholder, as, in cases of this kind, you will have the final say regarding size, materials, construction methods and features.
However, if you have already sold the property off-plan, or if you have been commissioned by a client, it is vital that you discuss these matters with those individuals as quickly and transparently as possible.
By being honest and frank about the situation regarding inflation, and by presenting them with a number of options, you are less likely to create problems in your professional relationship and run less of a risk of the buyer dropping out.
Before making final decisions regarding adjustments, try to clearly lay out every possibility for them to fully understand.
Explain the additional costs you – and therefore they – will be facing if things continue the way they are, then show how much certain adjustments could save them.
They can then let you know whether they are willing to go ahead with an inflated price or whether there are particular elements on which they will be willing to compromise.
Buy in Advance
A simple approach is to make purchases of items you know you will need for almost any construction project way in advance of its start date. This way, you will avoid being heavily affected by further inflation when that date arrives.
A smart approach is to enter into a contract with a chosen supplier as soon as you can and negotiate a set price for materials that will remain in place no matter what, then store those materials until they are required.
Key items like cement, reinforcement materials and lumber as almost universally used, so they may be a great place to start.
Of course, issues such as suitable storage and available up-front capital mean that smaller businesses are often less capable of doing this than larger ones.
This is a method that should be used sparingly, if at all. This is because, by making larger purchases than normal, businesses are likely to bring about further shortages, which, in turn, will push prices up even higher.
This will have a knock-on effect on the wider industry – something that is likely to negatively impact your own company in future.
Again, it is often only larger real estate development firms that have the capacity to buy significantly larger amounts of materials at one time, which puts SMEs at greater risk – so this approach is certainly a controversial one.
Why not seek out different areas in which to invest during these more challenging times?
Essential projects such as affordable housing will always be in demand – but will be especially sought after during times of inflation, as other types of property will become more expensive and tenants or residents may be forced to downsize.
Research recession-resistant options to keep your business afloat for the meantime, with a view to returning to your usual approaches once the economy enters a more stable period.
Employ one or all of the above techniques to keep your real estate development business flourishing in the midst of the current inflationary environment.
Be sure to take a responsible approach that does not contribute too much to price rises, and keep the end user in mind at all times to make sure the buildings you create are entirely fit for purpose. Using these approaches, your firm may be able to thrive rather than just survive.