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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10 July 2009

Why we’re in denial over housing supply

I’ve been reading with great interest the National Housing and Planning Advice Unit’s (NHPAU) report and research into the public's attitudes to housing, and the affordability problem in England.  They highlight the imperative of having sufficient homes to meet demand.

The NHPAU states quite rightly that attitudes to new housing development need to change as a matter of urgency. In their research 51 per cent of homeowners would oppose more homes being built in their area, compared with 31 per cent of non-homeowners!  So we’re in denial at a time when 6 million young people will not be able to get on the housing ladder until prices fall to more affordable levels and they have realistic access to a mortgage.

As I‘ve said in recent blog posts recessions do not impact on the number of people wanting a home, but they do cause a sharp drop in the number being built.  All this serves to exacerbate a growing problem of the mismatch between supply and demand.

The NHPAU’s report states that, “the evidence is clear: we need to take some major steps to close the gap between supply and demand or the consequences for individuals and families will become increasingly severe, with wider economic and social impacts.  We need to move the debate on from whether there is a problem… to how we can plan for the homes we clearly need in a way that will benefit existing communities and protect the environment."

What are the consequences of not enough housing being built?  More people will be homeless or live in overcrowded conditions, more young people will be forced to continue living with their parents, and the aspirations of millions to live in the type of homes they want, where they want, will be frustrated.  This lack of people mobility will impact upon the wider economy.

In some respects the whole issue of housing is being buried underneath the recession, but the housing problem will be here long after the recession has passed. Therefore, current and future Governments need to create robust policies that will improve Britain’s housing supply.  This is of course not as simple as it sounds.

What we don’t need however is knee jerk responses that will create mono-tenure estates of affordable and council housing that have no regard for creating sustainable communities and which would, if built, create a legacy of social problems.

As I said in my last blog we have got to address the issue of development finance if we are going to be able to increase housing supply.  Bank loans may not be as readily available in the future as they have been in the past.  So how the development industry is going to be financed in the future has got to be addressed.

I also can’t help but to think of the planning situation.  It is very slow to respond and the process takes an incredible length of time compared with the past.  Government has tried to improve it without much success, but the Conservative’s proposals are going to make the situation worse by delaying the system further.

I welcome the Government’s additional funding for housing that was announced recently and particularly the additional £500m of Kickstart support that will enable more developments to move forward.  However, the funding is still relatively modest when considered against the size of the problem.

Shared equity schemes, such as the HCA’s HomeBuy Direct and the First Time Buyer’s Initiative, are helpful in enabling more people to be able to buy a home they want.  Hundreds of people are now enjoying a new Countryside Properties’ home as a result, but more needs to be done on a grander scale and we need to make these schemes easier to access and understand.

We have recently launched a new video which highlights our unique approach to development.  I hope you enjoy it.

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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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2 April 2009

The fall in house building must now be taken seriously

The increased likelihood that only 60,000 new homes will be started this year is very worrying.  It is just 25% of the Government’s target of 240,000 new homes which is the level we need to meet if we are to keep pace with household formation. 

Even before the current recession, we have not built anywhere near 240,000 new homes for many years, so we now have a serious backlog that is building up faster and faster. As David Pretty recently pointed out, by 2010 pent-up demand for homes to buy, to rent and for affordable housing could well be over 1 million, and that is dangerously high.

What does all this mean for housing supply in the years ahead?  The Government has been trying to improve the situation recently, but it is not nearly enough.  There are of course many calls on the Government, but I believe that a serious housing crisis is looming and for those people who are on ever lengthening housing waiting lists it is already here!

A good many commentators are now saying that the banks and building societies will never again offer 100% mortgages and that it is right that people have at least a 5% or 10% stake in their home.  As a nation we overwhelming believe in home ownership, but we have got to get used to saving for a deposit and if people cannot afford to do that they will need to rent. 

We are therefore likely to need an enlarged private rented sector in the years to come.  This is because affordable housing will not be able to be delivered at a rate that is required to make up the shortfall in private housing, as at present its business model is inextricably linked to the strength or otherwise of the private housing market.

Government funding can only come from raising more taxes or borrowing more money and that just is not going to happen going forward, so we need to find other ways to meet our housing needs.

I’m pleased therefore that the Homes and Communities Agency is expected in the next few weeks to canvas support among potential investors for the construction of developments that could be privately rented out to meet housing demand. They are said to be exploring the idea of guaranteeing a minimum rental income to persuade the private sector to participate.  Such delivery models, which include joint ventures with the private sector, should be designed to be flexible enough to adjust to different market conditions. 

I do not believe that the house builders’ business model will ever be the same again.  Investment in the private rented sector is one such new approach that the sector should look at seriously with open minds.

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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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