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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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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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.

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21 May 2009

Property developers must cope with the present and look to the future

There has been a huge amount of media coverage in recent weeks of MP’s expenses alongside criticisms of bankers.  These issues must not be allowed to overshadow everything else that we must cope with during this recession, including doing everything possible to stabilise the economy and then bring about a recovery.  Indeed, we are planning ahead for the inevitable upturn. 

We are engaging with those providers of goods and services and considering how the development industry’s capacity can be stimulated through the training and re-employment of professionals and craftsmen who have been made redundant.  The question for all stakeholders is how we assist them and offer training to enhance their employment opportunities.  Without a coherent strategy and incentives it will be many years before we return to the necessary levels of delivery of 240,000 new homes per annum.

How is my development company coping with recession?  Like many developers we have deferred starting on some sites, slowed down the speed of construction on other projects and continuously reviewed our overheads and expenditure.  At the same time we’ve been looking at the best ways of selling the new homes that we’ve been building, whether this is via Part Exchange, Shared Equity or other buyer support.  As a result in recent months we have been experiencing encouraging numbers of visitors and reservations on almost all of our new home developments.

Where appropriate we have also sought assistance from the Homes and Communities Agency who have been given £600m of additional Government funding in the Budget to kick start a number of stalled housing schemes, including extra funds for HomeBuy Direct a shared equity scheme that we are currently offering on some of our sites. 

The scale of what is needed to stabilise the housing market and then bring about a recovery is considerable.  Whilst Government assistance is welcome, and will make some difference, it is not enough to get the development industry moving again.  The effective rationing of mortgages and finance for developments are still the critical issues.

Whilst we are coping with present difficulties we must not take our eye off the future.  We must prepare for it.  This is particularly so for developers and many parts of the public and private sectors where forward planning and investment are critical for future success.  Improving our infrastructure is a pre-requisite for many developments to move forward and therefore infrastructure works should get underway now.  Developers should not wait until the market improves to progress their planning applications.  Certainly we have been moving a number of major developments forward so that we will be ready to go ahead with them when the outlook improves.

Please do let me know if we can help you with planning and development issues that you may have.

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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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