Chairman's Blog

19 June 2009

Where is finance for property development going to come from?

In my blog post of 21 May I noted that the effective rationing of mortgages and finance for development are still the critical issues in getting the industry moving again.  In this post I’m going to look at finance for development in more detail and why it is so important for future housing production levels.

In normal market conditions finance for development comes from three principle sources:

• private finance (most of which is provided by the banks)
• grant funding from the Homes & Communities Agency (HCA)
• cross subsidy from the receipt of homes for sale to fund affordable housing 

The banks are suffering from a shortage of funds and are keen to rebuild their balance sheets.  They have also been concerned with the state of the housing market and are very unlikely to fund projects if there is any doubt regarding the saleability of the new homes.  Finance for development from the banks has therefore become increasingly difficult to obtain and where it has been available the costs have often been prohibitive.  This will not improve until housing markets show real signs of recovery and the banks can be confident that projects are financially viable.

In recent years cross subsidy had become an increasingly important part of funding affordable housing, particularly with the year-on-year reduction in grant funding levels.  Prior to the economic downturn average cross subsidy was around £25,000 per open market dwelling (up from around £10,000 only a few years prior to that).  With reduced price levels and sales rates, cross subsidy has almost completely ceased to work as a funding method.  That leaves project viability almost entirely contingent on the level of HCA grant and the possibility of ‘Kickstart Housing Delivery’ funding.

Developers are therefore looking at where finance is going to come from for new projects.  Even when the markets recover, will the banks be the main funders as in the past?  Will the increasing regulatory burden, that was starting to make many developments financially unviable even before the downturn, mean that they could lose their appetite for the sector?  At present I am concerned that we could see lower levels of bank funding in the years ahead.

The answer therefore lies very much in partnerships between the private and the public sectors.  During this downturn the public sector has been increasingly interested in taking equity stakes in projects and that is a positive step.  However, I hear that some of them want to take an equity position without taking any risk.  This is an unrealistic position on which to try to base an equity stake, as risk and development proceeds should be shared amongst the partners.  We have to work together if we are going to get housing production levels moving forward again.

The British Property Federation (BPF) has some interesting financing ideas in their newly launched ‘Regeneration Manifesto’.  These include using innovative new funding streams such as Tax Increment Financing which allows infrastructure investment to be financed by the increased property taxes that they generate.  They also suggest that central and local government use publicly owned assets to leverage in private funding through the expansion of equity sharing and public sector guarantees.  It is certainly the case that the public sector needs to shoulder more of the risk if we are going to stop housing and regeneration from seizing up.

I'm pleased to hear that the HCA has just announced that they have set up a new advisory group with a wide ranging remit to look at future sources of private finance for housing.  I hope they look seriously at the BPF's manifesto.

My company has extensive expertise in partnerships and joint ventures with many public agencies, including the HCA and SEEDA, and has experience of different funding models.  We would welcome the opportunity to work in partnership to develop new ways and means of finance for development.

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23 January 2009

The impact of policy and regulation on development viability

I spoke earlier today in London at a very enjoyable meeting of the Architects Journal ‘AJ 100’ Breakfast Club and amongst a number of things I talked about I highlighted that the development industry has become highly complex in recent years because of the very wide range of issues and technologies we are now dealing with.

As recently as the turn of the millennium it was an essentially simple industry.  However, the upward pressures created by the cumulative impact of policy and regulation by Central, Regional and Local Government have intensified since 2000.  Policy and regulation not only increase the complexity of development, but almost every new initiative adds to costs, whereas as yet few generate additional sales value sufficient to compensate for the extra cost.

These costs ultimately have to come out of land values.

As I have said, whilst I believe it is right to expect development to contribute to social and community infrastructure, increasingly we are also being asked to contribute to highways and public transport initiatives, education, flood mitigation strategies, and wider infrastructure issues.

The industry also faces an increasing number of local authority tariffs, and there is the prospect of the Community Infrastructure Levy which Government has said will be expected to raise more money than the current Section 106 agreements.

In addition, a study for English Partnerships has put achieving level 5 of the Code for Sustainable Homes at between £26,000 and £36,000 per dwelling. Zero carbon will require code level six, at even higher average costs.  My Company is making progress towards meeting these recently published requirements, but they will be highly challenging and we need the supplier base for sustainable technologies to be much more robust than it is today.

Now I hope this does not come across as being negative, or that I am ‘crying wolf’, but we do need to keep in mind the costs of all that new development is expected to cover.

It would be most unfortunate if escalating demands on land values ultimately led to fewer projects being economically viable, and thereby reducing housing outputs further.

There has to be a balance in deciding upon the various demands because it may not be possible to satisfy everyone’s hopes and expectations.

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