Higher costs in London have cut housing associations' ability to take on more properties, spurring regional inequality.
Planning approval slowdowns in the UK have been plagued by regional inequity in recent years, with 2025 proving no different.
According to the NHBC, seven out of twelve UK regions saw increased housing registrations in 2024, particularly in the North and Scotland, while London saw a 48% drop due to financial difficulties among affordable housing associations.
The result of fewer permissions in London and the Southeast is an exacerbation of shortages in these areas, whereas the Northwest and Midlands may see a more robust supply pipeline.
The causes
A new property sector report from Heligan Group highlights that higher gilt yields have pushed up benchmark lending rates and equity return requirements, straining project viability.
- Senior development loans range from 6.5% to 10 %+, depending upon the size and credit profile of the borrower.
- Mezzanine and junior debt costs are even steeper, typically in the low teens.
- Bridging finance remains expensive, typically 0.7%–1% per month (8–12 %+ annualised).
Sam Lewis, Head of Debt Advisory at Heligan Group, said, “Rising yields have compressed development margins by lowering Gross Development Value (GDV). Many developers have needed to reassess project feasibility, particularly in commercial sectors, where financing has become harder to secure without pre-lets or public sector anchor tenants.”
The cost squeeze is most acute for small developers, while large housebuilders have benefited from locked-in lower-rate land and economies of scale. In addition, building costs are continually outpacing the increases in land values, making it difficult to acquire finance.
The top ten housebuilders saw only a 4% drop in housing starts in 2024, while smaller developers saw a 36% decline. This year, construction business optimism has been similarly subdued due to delayed decision-making and global economic uncertainty. Many are mitigating risks by phasing projects, shifting to build-to-rent models, or securing equity funding.
“Developers are dedicating more time to strategy and less to on-site delivery, which is ultimately impacting the total number of homes being built”, added Lewis. “The PBSA sector has expanded in university cities but faces challenges due to its reliance on forward funding. Given affordability constraints and rent caps, developers have turned to institutional investors rather than banks for financing, a higher-risk strategy in pursuit of better yields.
“This approach has facilitated developments in Manchester and Birmingham alongside university partnerships that provide land and guarantees. PBSA remains in a growth phase, although growing value conservatism is starting to limit the quantum of lending available.”
Commercial developments in the hybrid working era
Demand for office space is evolving with hybrid work models, with prime offices remaining in demand while secondary offices face high vacancy rates. New speculative office developments are rare unless backed by pre-lets or public sector tenants, and retail continues to struggle with e-commerce shifts.
While post-COVID retail footfall rebounded in 2022–2023, structural challenges persist, and developers are focusing on mixed-use redevelopment rather than new retail schemes.
Lewis continued, “In the commercial property space, there are increasingly fewer deals that are working well for all parties, but we’re seeing more innovative structures emerging.
Growing gap between developer projections and investor valuations
Across all sectors, a growing gap between lender panel valuations and developers’ projections is slowing down deal flow. Lenders are taking a cautious, backwards-looking approach, while developers base valuations on future potential and market recovery. This disconnect is making it harder to secure funding, particularly for residential and regeneration schemes, pushing developers towards alternative finance and delaying project delivery.”
“While property financing remains tight, the gradual easing of monetary policy should alleviate some pressure. However, stagnant GDP growth and cautious consumer sentiment pose risks and housing completions in 2025 are expected to remain in the low 200,000s, with stronger growth anticipated in 2026. Inflation is moderating, with material costs stabilising but labour constraints keeping overall inflation around 3% in 2025, dropping to 2% in 2026.
Prediction for the best and worst performing regions
“Regionally, the Midlands, North, and parts of Scotland should outperform in development, while London’s housing supply remains constrained by financial uncertainty among housing associations. The commercial investment will focus on prime offices and life sciences hubs, while secondary office markets and retail remain weak", concluded Lewis.
