Knight Frank: Outlook for the housebuilding sector

Knight Frank spoke to nearly 70 housebuilders and developers across the country for its annual Housebuilder Survey. The companies represented in the survey built more than three-quarters of all new housing in England in 2015/16.

Knight Frank’s analysis of energy performance certificate (EPC) data suggests that the delivery of homes in 2016/17 breached the 200,000 mark. Indications from the survey suggest that levels of delivery will continue to rise in the short-term, with 58% of respondents saying completions would rise over the next 12 months, and only 11% saying that they would fall. Looking slightly further ahead, 58% of respondents also said that housing starts would rise.

However, only a third of respondents said that net annual supply of new homes in England could be sustained above 200,000 every year by 2022 under current market conditions.

The most recent planning data also indicates that delivery is set to rise, with an increase in planning for private residential units being granted. However, it is noticeable that while the number of units granted planning in England has risen, the number of schemes has fallen, suggesting that more large schemes are going through the planning system.

The cost of planning has risen in recent years, and is only set to rise further. While SMEs can attract funding for construction, it is difficult to finance the costs of planning given the risks involved, which can make it very challenging.

Yet, at the same time, the need for more SME developers to become involved in the market is well recognised. SME developers were responsible for 4 in 10 new homes built in the 1980s, whereas this figure is closer to 1 in 10 today.

The House Builders Federation has estimated that returning to the levels of delivery by SMEs last seen in the 1980s could boost overall supply across the country by 25,000 a year.

The paradox between the more complex planning system and the need for smaller developers has not escaped policymakers, with the Housing Minister calling on Local Authorities to release residential development sites suitable for smaller developers earlier this year. The Government’s Accelerated Construction scheme, currently running only on central government landholdings, is aimed at providing sites which can be broken up with the offer of joint ventures with SME developers on the smaller sites.

THE LAND MARKET

Activity levels in the residential land market have eased slightly in the last two years after a period when larger housebuilders, in particular, were fulfilling their need for strategic land.

Land values have to some extent reflected this, with the latest Knight Frank Residential Development Land Index showing that greenfield land prices dipped by 4% between late 2014 and the end of 2016. However, it is worth noting that land values in urban markets moved strongly upwards over the same period, as the economic recovery in some key regional cities continues to underpin pricing and spur activity.

The majority (54%) of respondents expect greenfield land prices to remain unchanged or to dip slightly over the next 12 months, while the opposite is true for the urban land market, where the majority (61%) of respondents expect values to rise.

The survey also suggests that activity in the land market is set to rise over the next 12 months, with the majority (69%) of larger housebuilders saying activity in the strategic land market will increase. Some 46% of larger housebuilders also said they would increase their acquisition of land with planning consent – or ‘oven ready’ sites – over the next year.

However, as examined later in the report, access to land is still a key challenge for developers and housebuilders. In many cases, especially where site assembly is needed, the co-ordination of making
the land ready for development, including guaranteeing infrastructure and utilities at the right time, can be a major hurdle, and ultimately a development risk for housebuilders. To mitigate these risks, there is a role for local authorities to step in and act as negotiators or ‘path smoothers’ to try and push development through.

HOUSING WHITE PAPER

Housebuilders and developers hoped for a greater level of detail in White Paper. More than four out of five respondents said the Housing White Paper did not go far enough in terms of reforms needed to address the challenges in the housing market. This may have something to do with the nature of the report, as, despite promising a direction on housing, much of the document was highlighting areas that need work and launching a series of consultations, which only closed in May.

Certainly, when asked to identify what was missing from the White Paper, ‘detail’ was a popular answer, as well as direction on the use of Green Belt land.

However, this is not to say that the respondents did not identify positives including the support for Build-to-Rent or Multihousing schemes and the support for local authorities (LAs) and housing associations (HAs) to build more homes. Perhaps the real question is what happens now, given the political uncertainty ahead. Post-election, Sajid Javid is still Secretary of State for the DCLG. The new housing minister, Alok Sharma, does not have a housing background, but does come from the financial sector and sits on the Treasury Select Committee.

Although Gavin Barwell, the former housing minister, lost his seat as an MP, his appointment as chief of staff at Number 10 may well indicate that housing continues to take some space near the top of the agenda.

More clarity will be delivered at the Autumn Budget this year, when some of the proposals are expected to be announced as future legislation.

HELP TO BUY

Another key policy question for the development market is the Help to Buy (H2B) Equity Loan. The scheme, launched in 2013 for new-build homes, is due to end in 2021. Until there is some certainty on what the next move is, it is difficult for some housebuilders and developers to finalise the development economics for upcoming schemes, particularly in parts of the country where H2B has been popular.

Some 53% of respondents to the Survey said that not extending the H2B scheme would have a negative impact on supply. Some 112,338 homes were purchased with a H2B equity loan between 2013 and end of 2016. Next year, those who took out a loan in 2013 will start paying a fee on the equity portion unless they have repaid it. The annual fee is 1.75% of the total loan, and this rate will rise in line with inflation (RPI+1%) every year.

CIL

The Community Infrastructure Levy (CIL) has had a chequered and long-drawn out introduction. The levy, announced in 2011, has still not been adopted in some local authorities, creating planning confusion. Also, the rates at which CIL are applied can vary greatly, causing more hurdles in the planning process.

Last year’s Housebuilding Report showed that nearly 40% of housebuilders thought CIL should be reformed. The government ordered a review of CIL late last year, and the results were published alongside the Housing White Paper. A further announcement is expected in the Autumn.

The review recommends reforming CIL, turning it into a less complicated Local Infrastructure Tarriff (LIT). This would be a mandatory lower level charge applied to all developments (residential and commercial).

However, Section 106 payments would be applied on larger developments – following the example already set by some LAs.

The majority of overall respondents thought the reforms would not make a difference to overall supply, but it is noticeable that 40% of large developers said that the moves would boost supply, while 34% of small developers thought it would have a negative impact, reflecting how the new rules would affect different parts of the industry.

BREXIT

The vote to leave the EU means the outlook for the whole UK is more uncertain as the Government negotiates a deal on what a separate UK will look like. Despite a rather upbeat outlook on housing supply overall from our respondents, they also signalled that this could be dampened by the triggering of Article 50 and the Brexit negotiations.

While the uncertainty over the Brexit negotiations raises the prospect of some economic turbulence, which could have second-round effects on the housing market, especially if employment and wages are squeezed, the more direct concern for most housebuilders around Brexit is access to labour. If the migration of skilled labour is curbed, this could affect the housebuilding industry as a whole.

Some 12% of construction workers across the country are from outside the UK, according to recent data from the Federation of Master Builders (FMB) although there are regional variations to this figure, with a larger proportion in the capital. As can be seen later in the report, access to labour is already seen as one of the biggest hurdles in the market, with 80% of respondents saying that this issue alone is having a negative impact on supply.

LABOUR

85% of large housebuilders say they are increasing opportunities for apprentices in the next 12-24 months This rise in the number of people being offered apprenticeships, while positive, is unlikely to be the short-term solution to the issue of labour. And the difficulties in accessing labour have wider repercussions for the sector as a whole.

Some policymakers are suggesting a return to local authority-led development. It is clear that housing associations are already taking up the mantle, becoming very active in the residential development land market.

The question of labour has resulted in increased attention on the opportunities for less labour-intensive construction methods, such as modular construction. Some 61% of respondents said that modular construction could have a positive impact on supply, even if it was in the longer-term. Some 39% said that this form of construction would make labour easier to source.

PLANNING

There was clear recognition in the Housing White Paper that the planning system is still posing problems in and around development, despite the many welcome reforms of the NPPF. An issue highlighted in last year’s Housebuilding Report – staffing in local planning offices – was examined, and a pledge was made to try and boost the resources of local authorities for this purpose, even allowing them to charge for some services and ring-fence the proceeds.

Yet, the rising cost of gaining planning is becoming a bigger challenge for smaller builders, and this is reflected in our survey. Whilst 54% of larger housebuilders say that the planning system was having a negative impact on housing supply, this rises to 88% for medium-sized firms, delivering between 100 and 500 units a year.

Another challenge for planning departments is trying to balance the tension between local concerns and national priorities.

Justin Gaze, Joint Head of Residential Development at Knight Frank said, “A simplification of the planning system has to be a goal. This would reduce costs and help housebuilders, especially SMEs, to build more housing.”

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