Property investment can still produce good returns as long as developers factor in rising inflation and refurbishment costs
The annual rate of Consumer Prices Index inflation increased to 1.6 per cent in December – its highest level for two-and-a-half years.
The resulting increase in costs of materials will make refurbishing a property, whether residential or commercial, more expensive. Indeed, research by the Federation of Master Builders found that 70 per cent of the 232 UK construction companies it polled had experienced a rise in prices of materials.
As such, some developers may need to borrow more money, which could have a knock-on effect on residential and commercial property prices. If the developer decides to lease the property in question, rent could also be higher.
A developer that wants to rent out its refurbished property will need to obtain long-term finance, which could be more difficult if it has to get a bigger loan.
Short-term lenders simply will not lend if there is no clear exit route to pay off the loan.
Meanwhile, a rise in prices paid for materials could also affect the profit margins of those in the manufacturing and construction sectors, leaving them to decide how much of the increased costs to pass on to customers.
That said, as long as developers factor in the full implications of rising inflation and the costs associated with refurbishing or developing, property investment can still represent a good return. The country is crying out for more residential homes or units, and bridging loans continue to provide the facility to make that happen.
Jonathan Sealey is chief executive of Hope Capital