Chairman's Blog

11 November 2009

Why we’re still confident about the Thames Gateway

The Thames Gateway is the number one regeneration project in the UK and probably in Europe too, and therefore it is very important not just to London and the South East, but nationally too.  However the biggest constraint to progress currently in the Gateway is the state of the housing market. 

Developers will not start projects unless they can be sure of sales.  Many sites are large and complex and are burdened with large upfront capital costs and this is all the more reason why developers and investors will think twice before commencing a project.  Therefore many schemes in the Gateway won’t get underway until market conditions improve.  Most of those projects that are in progress have been slowed down to reflect current sales rates and that is certainly true of our schemes in the Gateway.

The benefit of Kickstart

Some projects are being helped by the government through the HCA and others where they are prepared to bear some of the upfront risks and indeed such intervention is often welcome.  Initiatives such as Kickstart, where phase one of funding is now complete, are very welcome and it is beneficial to everyone who’s concerned with keeping new housing supply moving.  I was pleased therefore to see HCA Director, David Edward’s recent comments in Building about their continued commitment to the Gateway.

Confidence in the Gateway

I regard the current setback in the Thames Gateway as being relatively short-term.  My confidence in the Gateway has not waned and the long-term prospects are still very good. 

Whilst we are experiencing this period of slowdown we can nevertheless continue with the preparatory works and then developers will be ready to go once sales prospects improve.  Considerable emphasis therefore needs to be placed by public sector bodies on important infrastructure works such as highways investment around Ebbsfleet Valley.  Such preparatory work should be progressed now rather than waiting until development programmes can be speeded up. 

Learning the lessons

There will no doubt be a number of schemes that will have to be planned rather differently.  Lessons learnt from recent years include the fact that too many schemes have been designed to too high a density with a predominance of flats.  My concern has always been that this is not conducive to the creation of sustainable communities the success of which, from a social viewpoint, requires a balanced mix of house types and tenures creating a broad spectrum of price ranges and buying options.  All stakeholders will need to be very conscious of this issue. 

The move away from mono housing types is all to the good, I believe, and from it we’ll get more balanced and superior development solutions.  The lessons learnt in recent years must not be forgotten in planning future schemes.

Sustainable solutions

The current pause also gives developers and others time to think how best to include environmental objectives into future schemes.  The regulatory demands have of course not gone away in the recession.  We need to research how we can best achieve more sustainable developments and move forward with solutions that will have a lasting and positive impact, rather than a potential maintenance nightmare if we do not use proven systems.

Need for public/private partnerships

It is inevitable in my opinion that there will need to be more private and public sector partnering arrangements in place in the future.  This will be necessary as funding for development won’t be as readily available as in past years.  Banks and funders generally will be more cautious and new funding methods will have to be seriously considered as Savills Research has recently pointed out.  This is why I believe public/private partnerships will be the most appropriate way for development programmes to be enhanced in the future.

The key constraint

Funding for homebuyers continues to be the most major constraint in selling homes.  Many people who want to buy simply can’t.  Hopefully the strict lending criteria will ease a little, but it will not return to the sort of free and easy mortgage funding that has caused some of our recent problems.

Meeting the vision

The Thames Gateway will no doubt make a significant contribution to housing supply in London and the South East of England and where it not to happen it would bring about much greater pressure for development in these regions.  We must therefore work with renewed vigour to ensure the vision and the objectives for the Gateway are met.

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25 August 2009

Is the housing market recovery sustainable?

We are beginning to see signs of stabilisation in the housing market, which is encouraging, but can this be sustained?  The availability of finance for mortgages and development is key, but it is unknown when the supply of funds will improve. 

As the Bank of England has stated earlier this month, “It will take time for banks to repair their balance sheets and they face considerable challenges in replacing those sources of funding that dried up in the financial crisis.”

Housing demand gets ever greater, but additions to housing stock levels are negligible at present which will have significant social and economic consequences in the future.  Therefore if we don’t increase housing supply the need and demand will only ever increase for those seeking a home.

Caution required

The modest signs of improvement in terms of housing starts and prices are welcome not least to housebuilders and developers who have endured a very difficult period in the last 18 months or so. 

However, I would still remain cautious with respect to the housing market. Housing starts remain 53% lower than their peak three years ago and lending is still 36% below a year ago.  Indeed it is still the lowest July lending figure since 2001.

The positive news in the housing market comes from an unprecedented low earlier this year. Furthermore, there are three key risks to recovery in housing.  With unemployment continuing its rise towards three million, this could result in a fall in demand for house purchases and an increase in supply from those forced to sell.

Secondly, recovery in the housing market is heavily dependent upon the availability of finance rising further and while it has increased over the course of this year, this has been from unprecedented lows.  It will need to continue rising to meet the pent-up demand for housing in this country.

Finally, there are concerns that even when demand does pick up, then the industry has lost much of its capacity to deliver due to this recession.

Affordable housing

The supply of affordable housing has been nearly as hard hit as private housing due to the fact that much of it today is delivered through Section 106 agreements and cross subsidy from homes for sale.  The upshot is that housing associations have been as badly affected by the recession as housebuilders have. 

The latest thing that will add to the difficulties of the associations is rental levels being reduced by 2% next year which will affect their incomes further.  It is predicted that this could lead to a reduction of 4,000 new affordable homes being built each year.

Dealing with the housing crisis

I don’t believe the Government is addressing the issues with anything like the vigour that they should be.  What is the plan for the future?  The nation has a housing crisis and we need a robust plan to deal with it.

The Government has introduced a number of short-term measures but whilst these have been welcome, many of them have been robbing Peter to pay Paul.  The effect so far has been of increasing the uncertainty around such worthwhile programmes as the Decent Homes standard and the removal of funding to assist some new developments to move forward.

The Government also needs to address continuing shortages of permissioned land, and the impact of regulation and policy on development viability, both of which are major barriers to a sustained recovery in house building.

The time taken to receive planning consent is still not nearly as good as it needs to be.  If everything else was right in the housing market, which of course we are a long way from at present, we are not going to be able to improve supply if planning remains as it is now.

The supply of new housing ought to recognise the demands for sustainability not least the Code for Sustainable Homes and the requirements to comply with it.  This means we need increasing numbers of homes that are suitably efficient to meet the Code.  This increases development costs significantly thereby reducing viability at time when increasing supply is a priority for the nation.

So, in summary, recent news in the housing sector has been positive, but there are downside risks and, as a consequence, I believe we need to be cautiously optimistic about a sustained recovery at this point.

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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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9 January 2009

The outlook for the housing market in 2009

This recession has highlighted the importance of the housing market to the wider economy.  It all started with a banking crisis in the USA that quickly spread to the UK.  That adversely impacted immediately on the US and UK housing markets.  As so often happens when this attracts media interest the downturn has accelerated with the result that the number of housing transactions has reduced significantly and as prices have fallen.

The present situation will only be resolved when the supply of funds for mortgages increases.  We have not, as yet, seen any improvement in the supply of funding for home loans in response to the Government’s sizeable support to the banking sector.  Hopefully the supply of funds will soon start to improve and only then will the markets become more active and house prices stabilise.

The best I expect to see in 2009 is for house prices to stabilise during the year and only then the market will gradually improve.

This is a particularly difficult time for first time buyers.  100 per cent mortgages have gone probably forever and they will have to save more of the finance they need.  Mortgages of four times income are typically the maximum available today.  For most people who already own a house and want to move they will generally not be able to do so without finding a buyer and at the bottom of every chain is a first time buyer.  Therefore it’s very important that funding to first time buyers starts to flow again.

The consequence of this crisis is that more pressure is put on the affordable housing sector.  This is due to those people who can’t now afford to buy turning either to the private rented sector which can be expensive or to affordable housing for shared ownership or rental.  The bottom line is that it maybe cheaper for the Government to find ways to help first time buyers than trying to fund the increased provision of affordable housing.

My belief is that when housing markets start to improve the benefits will be seen in the wider economy but not until then.

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15 December 2008

The housing market and the Homes & Communities Agency

It is good news that the Homes & Communities Agency (HCA) has been launched even if it is at such a difficult time for the housing market.  English Partnerships and the Housing Corporation have served housing and regeneration well and I would like to thank all those people who have been involved in them.

It is encouraging that the HCA in these very early stages is seeking to engage and know more about the problems being encountered by new homes developers and particularly how to respond to the economic recession.  The HCA is aware that without the private sector there will be little actual housing delivery.  However, as helpful as the HCA and other bodies such as the RDAs might be, the fundamental problem for the housing market is the shortage of finance for home loans.  The banks and building societies have to rebuild their balance sheets and they have a shortage of funds to lend.  However, now that interest rates have been reduced it’s a disincentive for investors who the banks and building societies are reliant on for their money supply.

Everyone really needs to understand the need to stabilise the housing markets otherwise prices will continue to fall, confidence will be lacking and as a result homebuyers will put off their decision to purchase.

How can we therefore stabilise the housing market?  The priority is to find ways and means of assisting first time buyers as without them the rest of the market cannot move. 

What sort of assistance can we bring to first time buyers at this time?  To answer this we need to look at what the pressures on them are.  They need a larger deposit than in recent years at around 10% of the purchase price.  They will not be allowed to borrow more than their financial status allows – around 4 times annual income. 

How far can we help first time buyers with their deposits?  Some in the new homes industry have introduced equity share arrangements from 15% to 30% for a period of up to 10 years.  In addition, English Partnership’s First Time Buyer Initiative has been very helpful to many and successful for us too.  We hope to be able to shortly offer the new HomeBuy Direct scheme at a number of our developments.  However, we’re not expecting to assist first time buyers into the long-term and maybe through the HCA, RDAs and Pathfinders (where they operate) we need to consider and come up with new initiatives to help first time buyers.

First time buyers purchase second hand properties as well as new of course and by assisting them it will undoubtedly help to get the wider market moving again.  Existing homeowners are finding it difficult to sell.  Many won’t sell at today’s prices whereas there may be good reasons why they need to move such as a change in job. 

We really have got to do everything possible to get housing markets more active again which will in turn be good for the wider economy.

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