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Risk in Context

Private Rental Sector Construction: How Much Could a Delay Cost You?

Posted by Rahul Sharma 13 September 2017

Imagine you are developing a 350-unit building for the private rental sector (PRS), due to be completed in a month’s time. Tenants have already signed contracts for half of the units. Suddenly, a water leak damages a large proportion of the property. You find yourself not only missing the completion date to fix the damage, but missing out on rental income, as well as providing alternative accommodation for those tenants that have already signed contracts.

This example highlights just how vital reaching the practical completion date for a project can be to its success.

Delays can be caused by a myriad of factors such as fire, water leakage or other damage to the structure, litigation, planning issues, and more. With the number of PRS projects increasing across the UK, and the projects themselves becoming larger and more complex, considering the following in your risk management plans has never been more important:

Cost overruns: A project delay may not have been taken into account in the original budget, and the potential for a delay to contribute to a cost overrun can be colossal. During this time, the developer is still likely to have ongoing debt service obligations on the money borrowed. 

Loss of income and alternative accommodation:  In the example above, if a 350-unit project anticipating GBP300-per-week rental income per unit were to face a three-year delay caused by major fire or escape of water, it could cost the developer more than GBP16.3 million in loss of rental income.

Often, landlords and property owners will aim to have a certain percentage of tenants signed up before the building is completed, and alternative accommodation will need to be arranged for such tenants, at the cost of the developer.

Missing your target audience:  For some PRS projects, completing them in line with a certain time of year is often important to their success. For example, some of these will target recent graduates or students as potential renters. As a result, having the building operational by September is often critical in attracting this audience. Not completing by the desired date has the potential to result in challenges filling the property, and as a consequence, lost rental income.

Being aware of the consequences a delay could have on your project and proactively take steps to mitigate potential losses. In addition, policies are available in the construction insurance market to indemnify delay losses.

Related to:  Real Estate , Construction

Rahul Sharma