Understanding the Risks of New Housing Development

May 25, 2022

If you underwrite property insurance, you may be wondering whether insuring new housing developments is a safe move for your agency. Although newer developments may avoid some of the maintenance and safety problems associated with older properties, you may still want to research the risks of new housing developments. Before you make insurance recommendations to your clients, here are a few key answers to the question: Are there risks associated with buying in new housing development?

Market Cycles May Jeopardize the Value of the Investment

One common risk your developer clients may be facing is the potential downturn of market cycles harming their return on investment. When developers invest in building new housing, they may be making decisions based on current property values, expected price trajectories, and projected appreciation over time.

Should the markets take a sudden downturn, your clients may struggle to pay off debts and bills, including insurance bills. It may present a particularly acute risk if your clients’ construction timeframes are long, as markets could change significantly between project inception and completion.

The good news is that with appropriate risk assessment before beginning construction and with competent management, your clients may be able to make realistic projections and avoid a financial crunch. You can discuss potential risk management strategies with your clients.

Construction Timelines Can Impact the Profitability of a Project

Before breaking ground, developers need to consider how long, and complex a given project is, whether it’s feasible to complete in a reasonable amount of time, and their expected profit margins. Your clients should ensure their comprehensive construction plans address:

• Timeframes for legal approval from local governments
• Estimated wait times for necessary construction materials
• Planned project timing

Legal, Political, and Economic Factors Could Impact New Housing Developments

Lastly, it’s important to remember that several external factors could change your clients’ calculus in planning new housing developments. Changes to the law and upheavals in the economic or political environment, both in the region where your clients are based and in the locations of the planned developments, could necessitate sudden plan modifications.

For example, new tax regulations may make a project too financially burdensome in its current state, forcing developers to reconsider certain projects or make changes to cut their sunk costs. Your clients should keep a close eye on the news in their area and consider working with an attorney to ensure compliance and devise feasible development plans for all situations.

Understanding the risks associated with different properties and developments is crucial for property insurance agents. Before you meet with your clients to discuss coverage options, review these common risks associated with some new housing developments to get informed about the issue, make prudent recommendations, and issue appropriate policies. ◼