Lower borrowing costs, first-time-buyer support and new tenure models would help unlock development

With the government still nominally clinging to its pledge of building 1.5 million homes in this parliament, it is increasingly clear the housing sector cannot deliver in its current form. Cost and regulatory pressures make many schemes financially unviable. To hit the target, we need to radically rethink how risk is distributed and value created in residential development.

Much of the private market is hamstrung by the viability gap. Sticky land prices, construction cost inflation and the planning process are all well-known issues. Gateway 2 safety compliance is blocking schemes above 18m and local value ceilings are squeezing developer returns. Add to that the current cost of finance and it is no surprise investors are looking elsewhere. When state government offers returns close to those of a risky development, the reward for taking that risk is too small to make it worthwhile.

While the social and political need for housing is undeniable, investor and developer appetite to build is shaped by different forces: profitability, risk appetite and certainty. Until these stars align, homes will not be built.

To close the viability gap, we need better alignment between public goals and private incentives. That means looking again at policy levers such as affordable housing contributions to make them more responsive to economic conditions. Meanwhile, we need to find ways to incentivise landowners to sell.

Building safety standards, second staircases, increased community infrastructure levy payments and design requirements from the London Plan have layered cost on to already marginally viable schemes. Late-stage viability assessments and affordable housing obligations further deter equity investment, rendering many schemes unfinanceable from day one. Meanwhile, sales values have remained flat for a decade and first-time-buyer incentives have evaporated, leaving developers squeezed from both sides.

Developers are simply waiting out the storm. The £39bn funding announced by the government for social housing offers one solution, but the reality is nuanced. For a start, this money is spread over a long period of time, so it is unlikely to be as valuable as it first appears. Secondly, housing associations are dealing with issues such as cladding remediation and Awaab’s Law, requiring landlords to fix damp, mould and health-threatening property defects in a set timeframe, diverting funds for development.

That said, the direction of travel is positive, with the new 10-year rent settlement announcement a recent highlight.

Four key areas
If we are serious about unlocking development, four areas need urgent attention. First, high base interest rates raise return expectations and slow equity investment. Until borrowing costs fall or prices adjust, investor participation will remain selective. Second, the government needs to support first-time buyers and explore tenure models such as later living to help unlock the housing ladder.

Third, developers need to explore innovative joint structures, whether it is local authorities providing land, pension funds supplying capital or developers pivoting to new exit options beyond B2C sales. Lastly, we need multi-year, place-based housing programmes with clear rules and infrastructure support, giving developers and investors the certainty missing from site-by-site negotiations.

I believe the market will turn. Capital is not scarce. Institutional investors are still seeking yield. We are advising clients to stress-test their assumptions, diversify tenure strategies and forge relationships with funders, councils and community stakeholders. The developers that are flexible, proactive and partnership-driven will be best placed to thrive with the next growth cycle.