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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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6 May 2009
Are we really using our resources wisely?
The development industry has had its capacity reduced by around 50% in under two years – an incredibly short time for such a major contraction. Most companies have reduced their management and staff dramatically, and with the majority of developers relying on the banks for finance to undertake development which has largely not been available, it obviously reduces the overall capacity of the industry to produce the numbers of homes that we know are needed. So how else can our housing requirements be delivered?
I believe we increasingly need to turn to partnerships between RSLs, local authorities, the Homes and Communities Agency (who would inject Government funding) and private developers. We need to be thinking about all of this now, as when markets improve and housebuilders want to increase their programmes they won’t be able to achieve this in any significant way without public / private partnerships.
This grand idea could easily be thwarted however by lack of Government funds going forward. In this respect isn’t it time for Government and their advisers to look at how to spend taxpayers money more efficiently, especially in the depths of a recession? How much is wasted? As John Gummer highlighted in an excellent column in the Estates Gazette on 25 April there are numerous examples of billions wasted on white elephants. Indeed the Whitehall savings announced in the Budget are a trifling sum.
In the private sector we are well aware through recent bitter experience that savage cuts have had to be made, but we have not seen any meaningful cuts in the public sector particularly at national level. Obviously we need to ensure that essential services are adequately funded, but there are plenty of non-essential services that could be cut back. Is everyone in the public sector fully employed on tasks that matter, that will really make a difference and add value? I doubt it. Is the taxpayer getting value for money? Now more than ever we need to be efficient and cost effective in all that we do. I urge the public sector to work with the private sector to help make this a reality.
We could use some of the savings for a high-speed rail network for example and we could start to build the new homes that the nation needs to reduce the backlog of the last decade. This is what would retain development and construction skills and boost housing supply and the economy. If we don’t make the big cuts that are necessary, we won’t have the resources to make a real difference.
There needs to be a thorough review of public spending and maybe then more money would be available for housing. Many stalled housing schemes need pump priming to get them back on track. Otherwise I fear if we don’t do something significant soon the nation is going to face an increasingly severe housing crisis.
A further key constraint on development going forward could well be the recent cutbacks that have been seen in some local authority planning departments. Prior to the recession most planning units were under-resourced and over-stretched by the sheer number of applications and their increased complexity. Whilst the number of planning applications has reduced in recent times, my concern with any cutbacks is that when markets improve and applications start flooding in again development will be severely constrained by the lack of local authority planners.
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10 February 2009
The impact of recession on regeneration and sustainability
I have been reading with interest in the last few days the Parkinson Report on the impact of the credit crunch on regeneration, the housing market and commercial property. It is so disappointing that regeneration and sustainable development, which have really progressed in the last few years, are being slowed down and in some cases halted due to the recession.
Regeneration has made a real difference across the country in the past decade since the Urban Task Force Report and its recommendations were published. Many of our towns and cities have benefited considerably from regeneration projects, but there is still much to be done. Sustainability will also continue to feature as an important issue, but progress is likely to be affected.
The problem is that the significant downturn in the housing and property markets has resulted in lower prices because of fewer buyers and an overall lack of confidence. Many developments which have been programmed to start are unable to proceed often due to a lack of funding. As a result of the credit crunch, lenders are generally short of funds and are also lacking in confidence. If they are lending at all they will only lend on much stricter criteria which can often be to the detriment of urban regeneration schemes in particular.
Some people will be pushing to continue with the development of affordable housing where it is largely being paid for by Government funding. However, my concern is that affordable housing should be part of mixed-tenure projects as this is very important in creating sustainable communities. If affordable housing is built separately from private housing it could lead to mono-tenure estates with adverse social consequences.
We are currently seeking ways and means of enabling regeneration projects to take proceed where we are able to secure financial support from the Government through its Homes and Communities Agency (HCA). I believe the HCA can play a very important role during these difficult times. It is also essential that Local Authorities and RSLs work in partnership with private sector developers to find ways to enable projects to start rather than being held over until the recession ends.
I will post part two of this blog shortly.
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Information correct as at 22/06/2010