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.
Enjoy this post? Get more like it by subscribing to my blog either by clicking on the RSS feed link at the top right of the page or by emailing group@cpplc.com
16 June 2009
Playing politics with housing supply
In the Government’s Housing Green Paper they state “that housing is critical to Britain’s future – the decisions we take today make a crucial difference to the lives of generations to come. Our first challenge is to provide more homes.” So housing supply should be concerning Government in a major way. But where is the impetus going to come from?
In recent years we have seen a succession of Housing Ministers and CLG Secretaries of State. The latest reshuffle has seen a new team of Ministers at the CLG and as a result it is lacking in direction – at least in the short-term. John Healey does have experience of planning, but the new Ministers have a steep learning curve and bulging in-trays. Therefore there is going to be a vacuum whilst they try to pick up the baton.
CLG’s remit is broad. They set ‘policy on local government, housing, urban regeneration, planning and fire and rescue’ and have responsibility ‘for all race equality and community cohesion related issues and for building regulations, fire safety and housing issues’. This is a critical time for housing and regeneration when we are only building one new home for every three households that are being formed. Indeed, almost 5 million people are likely to be on council waiting lists by the end of this year. We therefore need to do what we can to help the new Ministers get up to speed.
A General Election will happen within the next 12 months and therefore all the parties need to be thinking about what they can do to boost housing supply. The Tories through their Housing Policy Paper are proposing considerable change in scrapping regional planning. It is simply too revolutionary. The Tories' plans would wreak havoc at a time when new housing production is at such low levels and when we need to invest in our infrastructure. It will make the under-supply of housing even worse as planners and everyone else involved in the planning process gets to grips with an entirely new system. It would be far better to modify what we have and make it work better.
However, no party has yet articulated robust plans to tackle the chronic shortage of new and affordable housing across the UK. I would urge all the political parties to fully understand the issues before developing their thinking further. They need to take a more holistic approach to housing reform.
Enjoy this post? Get more like it by subscribing to my blog either by clicking on the RSS feed link at the top right of the page or by emailing group@cpplc.com