Further to last month’s newsletter looking at the impact of changes being introduced by the National Planning Policy Framework and the Growth and Infrastructure Bill, this month we are taking a closer look at the funding initiatives intended to kick start further construction.
Help to Buy - extension of Firstbuy and Mortgage Guarantee Scheme
The Government has announced an extension to what was branded Firstbuy to aid all buyers (not just first time buyers) of new properties with up to £600,000. The extension will come as excellent news for the residential property market as analysts believe the required deposit for first time buyers will soon rise to over £100,000 in many UK cities.
The mortgage guarantee scheme will be available from January 2014 and is available for all properties (but still subject to the £600,000 cap). The final details are to be agreed with lenders but essentially the Government will provide lenders with the option to purchase a guarantee on the high loan to value portion of a mortgage for which the Government will charge a commercial fee.
Both schemes are demand-led which has prompted some commentators to suggest the schemes will serve to only push up house prices rather than increase house building. However, it seems more likely that the usual consequence of increased demand will be for more houses to be built.
Cash injection for Affordable Homes
In the budget, the Treasury has provided an extra £225 million to support the delivery of up to a further 15,000 affordable homes and still seek to bring 5,000 empty homes back into use. This additional capital funding aims to redress possible loss of Affordable Housing provision related to the modification of the reduced Affordable Housing obligation within planning agreements referred to in Part 1 of this article and the funding gap created by reductions in grant.
It has also announced an increase from £200 million to £1 billion to support the private rented sector.
Additional infrastructure commitments
Further to its commitment to underwrite an initial £50 billion to be made available to support infrastructure investment last year, the Chancellor announced another £3 billion a year investment in infrastructure to be funded by cuts to other Government departments. The funding is due in 2015 which some groups have described as 'too little too late' but others have optimistically viewed as having 'sowed the seeds for jobs and growth'.
The National Loan Guarantee Scheme (NGLS)
The NGLS has been introduced to assist bank customers to borrow at a cheaper rate. The scheme works by the Government providing guarantees on unsecured borrowing by banks, which in turn enables them to borrow at lower rates - this benefit is then intended to be passed on in its entirety to businesses by the participating banks. Since the NLGS was launched, it has reportedly helped businesses access cheaper finance by reducing the cost of bank loans under the scheme by one percentage point. It also appears to have been popular, in that over £2.5 billion in cheaper loans have been offered to in excess of 16,000 businesses so far. However, we understand borrowers are sometimes being forced to accept these revised terms.
Notwithstanding this, the Chancellor has extended the NLGS to include small and medium UK businesses with a turnover of £250 million (from £50 million) stated on their last financial or management accounts. The SME, however, must not be experiencing any financial difficulties to apply for a NLGS loan. The interest rate payable on any loan granted (a participating bank's normal lending conditions will apply) will remain at 1% less than would have been payable had the participating bank been outside the scheme, so potentially giving eligible SMEs access to cheaper credit.
Basel Committee recommendations
Finally, looking beyond 2013, the Basel Committee on Banking Supervision has made recommendations that the minimum cash quantity held by banks should be relaxed and the Liquid Coverage Ratio introduced whereby banks would be permitted to hold a wider range of assets, including, but not limited to mortgage-backed securities and lower-rated company bonds. The hope is that the four year phasing in of the scheme by 2015 will increase the appetite of banks to make loans to individuals and companies for (amongst other things) housing and development in the short term.
It is hoped by the Goverment that these initiatives will assist to fund and help start building so as to boost the economy and generate around 140,000 jobs in the construction sector.
However, as all parties in the industry are aware, new projects are currently slow coming to market, there is limited certainty in long term Governmental commitment to new schemes and the ability to obtain financing (notwithstanding the new initiatives) remains severely limited.
As a result of the continued funding squeeze, we are seeing a large rise in alternative ways to fund new schemes - be this through alternative finance arrangements, long term partnering or through joint ventures releasing equity (particularly in land and housing deals). This has led to a large increase in the number and range of developments we undertook last year and are currently undertaking.