Over the past few years, development finance valuations have remained notably flat. While this suppressed stability is relatively reassuring, it’s also important to understand the ongoing pressures that are shaping the development landscape, particularly across residential and commercial sectors.
This lull is a culmination of wider economic conditions and sector-specific hurdles. High interest rates have persisted longer than many anticipated, significantly raising the cost of borrowing for developers. At the same time, inflation has continued to squeeze profit margins, with construction costs, in terms of both materials and labour, remaining stubbornly high.
In the residential development space, mortgage rates have directly impacted affordability for buyers, which in turn has slowed the pace of new build sales. Planning delays and an overburdened system have added another layer of frustration, particularly for SME developers. Meanwhile, institutional investors have increasingly shifted focus to Build-to-Rent models, in search of more predictable long-term returns. This diversion of capital has contributed to the decline in housing supply and limited opportunities for smaller players.
Commercial development has faced its own unique set of headwinds. The shift to hybrid and remote working has softened the demand for office space, while retail continues to grapple with long-term structural decline. Stricter energy efficiency regulations, particularly around EPC requirements, have also increased the cost and complexity of bringing commercial developments to market.
Where could growth come from in 2025?
Despite these challenges, there are encouraging signs of recovery on the horizon. A potential easing of interest rates could provide a much-needed boost to developer confidence. Government-backed housing initiatives and increased funding for brownfield regeneration projects may also unlock fresh opportunities, especially for smaller, regional developers who have struggled to compete with institutional giants.
Modular construction and modern methods of building are gaining traction, offering developers faster, more cost-efficient ways to bring schemes to life. Similarly, the rising importance of ESG-aligned finance is reshaping funding strategies, with lenders and investors increasingly favouring sustainable and community-conscious developments.
In commercial development, a shift in focus is creating new pockets of demand. As underutilised retail and office spaces become ripe for repurposing, developers are turning their attention to creating mixed-use, flexible environments that reflect today’s live-work-play preferences.
The rise and rise of semi-commercial assets
While many asset types have faltered, semi-commercial properties have emerged as a bright spot in the market. These hybrid properties, blending residential and commercial elements, have proven to be resilient, delivering solid rental yields and offering income diversification. With tenants increasingly seeking convenience and flexibility, mixed-use properties are ticking all the right boxes.
What’s driven this growth? In part, it’s the availability of competitive financing products tailored to these asset types. But it’s also a reflection of wider urban trends, including the rise of localised living, town centre regeneration, and increased interest in community-focused development.
Looking ahead, the semi-commercial sector still offers strong potential, particularly if interest rates are reduced and government support for conversion and regeneration schemes remains in place. However, intermediaries should stay attuned to planning restrictions and shifting tenant expectations, both of which could impact long-term viability.
In a market that’s demanding agility and expertise, the intermediary community has a key role to play in helping landlord, investor and developers to capitalise on opportunities and emerging trends going forward. And this is also where specialist packaging partners can add further value, support and a trusted source of alternative and bespoke funding avenues along the way.
