Much has been made in the press of the likely negative impact of the Vote to Leave, particularly in relation to the construction sector, which accounts for 6% of the UK’s economy. That was 2016 though….and a new year brings new outlooks on life together with (counter-intuitive?) growth in the economy.
In the midst of market uncertainties, some fundamentals remain, which will continue to shape housing guidance and policy over the next few years. There is a housing shortage. There is a political imperative for the government to create jobs and bolster confidence. There is a skills shortage. Possible legislative ‘dampeners’ which were already in the pipeline will now surely be addressed or mitigated. The long-awaited Housing White Paper has now been launched, Theresa May affirming the need “to build many more houses, of the type people want to live in, in the places they want to live”.
The housing shortage is often in the press and this is a big focus nationally, for the government, and regionally, for the London Mayor. The Mayor felt he couldn’t afford to wait for the White Paper, and instead issued his own guidance in November 2016 (when the White Paper was being lined up to be published).
The key problem, without any doubt, is the lack of supply of homes that are affordable. House prices have been outpacing earnings since the early 2000s. Simon Rubinsohn, chief economist at RICS, agrees that supply is the core issue for the market: “the legacy of the drop in new build following the onset of the global financial crisis is now really hitting home, with both the sales and letting markets continuing to show demand outstripping supply.” A BBC investigation has found that the average rent of a one-bedroom property in almost half of all districts, boroughs and cities across England costs more than 30% of the median take-home salary in those areas. Unsurprisingly, most badly affected is London and its environs. There are also pockets of deprivation in the North – Greater Manchester, Yorkshire and the West Midlands.
Government spokesmen are giving a positive message regarding support for the construction of new homes. In the Queen’s Speech in May 2016, the government pledged to build a million new homes by 2020. Mayor Sadiq Khan’s stated aim is to ensure that 50% of new homes built in the capital are genuinely “affordable”. This target was initially a manifesto pledge but has been maintained and confirmed in the preamble to the new London Plan, “A City for all Londoners” and the November 2016 Guidance.
Despite the overall target of 50%, in the November 2016 document both the Greater London Authority and Deputy Mayor (Housing) James Murray have backed the 35% benchmark. If the developer ensures 35% of the homes built are genuinely affordable, on they march to planning permission and they will not have to submit a viability assessment. Developers who fail to reach this benchmark will need to submit a full viability assessment for review, and that will be vigorously reviewed. This proposal aims to increase transparency, standardise assessments and increase the availability of genuinely affordable housing.
Khan supports overseas investment and is quoted in The Guardian as saying, “We welcome investment from around the world in building new homes, including those for first-time buyers”. Part of the plan to attract that investment is the November 2016 document, as it formally sets out the direction of Mr Khan’s strategy on housing. However there is still more to do – the London Plan, the Mayor’s Spatial Development Plan for Greater London still needs to be updated and that work continues this year, though there is some way to go: the formal consultation is programmed to start only in Autumn 2017, with the Examination in Public of the emerging draft plan in Summer 2018 and finally with adoption in Autumn 2019 – and that will be three years into the Mayor’s four year term. So much for urgent action…spatial planning moves at a glacial pace.
HM Government’s White Paper
After many false starts and a winter of discontent from the Tory backbench, the government finally managed to release the Housing White Paper on 7 February. Not as radical as many had hoped for, effective resistance from the aforesaid backbenchers to chipping away at the Green Belt has forced some compromises. The government has refused to directly intervene in the market by building out homes on publicly-owned land. Fundamentally, too, the rate of delivery seems to assume that there will be an increase in the supply of skilled workers in future years, post-Brexit…
Nevertheless, the ‘brokenness’ of the Housing Market has been acknowledged. Policy initiatives to address this are being supported (see below).
An obvious way to support the construction of new houses is via spending. Philip Hammond recently announced two multi-billion pound housing funds to alleviate the housing crisis. The first is to borrow circa £2 billion to create a new construction scheme that will fund up to 15,000 new homes on unused public land by the end of the current parliament in 2020. In addition, Mr Hammond announced a further £3 billion in borrowing to create a Home Building Fund which will be for house builders to draw on to build another 25,000 houses by the end of 2020. In relation to planning policy in our capital city, Gavin Barwell and Sadiq Khan have emphasised the importance of protecting the green belt. “A City for all Londoners” strongly promotes focusing future developments around existing and future transport nodes. This aims to increase development whilst protecting the green belt. Sadiq Khan has said he will accelerate development in over 40 Opportunity Areas and in many more Intensification Areas. Khan aims to “bring forward all 31 Housing Zones to full capacity.”
The government is also pushing local authorities to develop on brownfield land as confirmed recently by a Communities and Local Government spokesman who said that “councils must prioritise development on brownfield land”. Since his election to Mayor in May 2016, Khan has approved the capital’s single largest regeneration scheme at Barking Riverside in east London. The site is a 180-hectare brownfield site on the northern banks of the River Thames. This site was previously home to three power stations and a large amount of landfill. The current level of affordable housing has been set at 35% from the outset, with provisions to raise this to 50% over time through additional investment and viability reviews. In addition, he has approved plans for a large housing development on the Old Oak and Park Royal site in west London where the number of affordable homes at this development has been increased from 200 to 242 meaning an increase from 33% of the total to 40% of the total, with the possibility of raising this to 50% in the future.
Modular homes are a theme which has been picked up in the White Paper. These are today’s version of yesterday’s pre-fabs. The White Paper suggests that homes constructed offsite “can be built up to 30% more quickly…and with a potential 25% reduction in costs”. Increasing output will drive down construction costs. Homes can be installed within a single working day and finished to any specification. Assembling requires less skilled manpower which is also helpful.
Essential Living’s Creekside Wharf development in Greenwich is flagged by way of a role model. This comprises of 249 apartments built using offsite modular construction.
The government has said it will support modular housing via:
- the Accelerated Construction programme
- the Home Builder’s Fund
- working with the industry to ‘sell’ the concept of modular building so that mortgage providers enter the market
- reviewing the planning system to ensure that it is supporting new construction methods (a high-level aspiration!)
- reviewing the availability of seed capital and other funding to support modular construction companies (again, no specifics given yet).
The Private Rented Sector (PRS) is home to 4.9 million households in the in UK, which has more than doubled since 2001 and is now the second largest housing tenure according to a report by the Paragon Group having overtaken social housing. The government are putting £3.5 billion into the housing guarantee scheme which is intended to bring institutional investors into the market. The first bond under the scheme was issued in November 2016 for £265 million.
High demand for university places is continuing to drive the student accommodation market, for example freshers at the University of Warwick are being forced to share rooms as at least 100 first-year students will this term have to divide up space meant for one person due to a shortage of rooms. Investors are increasingly drawn to student accommodation as well as hotels as these markets are offering competitive returns. Attractions include the counter cyclical nature of the student accommodation sector as university enrolments have consistently grown during periods of economic downturn. Singapore’s sovereign wealth fund GIC and student accommodation developer GSA have bought a £700m portfolio – this is the largest deal in the sector this year. This development will increase the supply of student accommodation across six cities – Liverpool, Bristol, London, Edinburgh, Cardiff and Southampton.
In the pipeline – legislative challenges?
As from 1 April 2018, there will be a requirement for any properties rented out in the private rented sector to have a minimum energy performance rating of E on an Energy Performance Certificate (EPC). The EPC Regulations 2018 require some response in respect of properties that are defined as “sub-standard” in terms of energy efficiency – those whose energy performance indicator is below “E”. The regulations affect both commercial and residential properties, and a report by Elements Property indicates that for the period Q1 2008 to Q1 2015, 35% of Non-Domestic buildings which had an EPC survey carried out were achieving an E, F, or G rating. For the same period, 26% of Domestic properties achieved an E, F or G rating. This official Government data suggests that a significant proportion of the UK building stock could be affected by the new energy performance regulations.
There are cost and time implications for developers, who will now need to carry out an audit of property portfolios to identify which properties may be within the scope of the regulations. Energy efficiency improvements will need to be costed and paid for. Those who own freehold assets awaiting development could find that the timetables of their future development programmes are affected by the regulations. However, the Regulations may also create opportunities for developers through reducing the acquisition costs of property below the minimum standard.
Base erosion and profit shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. Under the inclusive framework, over 100 countries and jurisdictions are collaborating to implement the new BEPS measures and in doing so to tackle BEPS. The UK is a prime mover in this global initiative, and changes will be introduced to our tax system in the Finance Bill, to take effect from 1 April 2017.
This article does not address BEPs issues fully. Suffice to say that the impact of BEPS on developer companies paying UK corporation tax may be significant. Presently, the rules do not apply to non-resident UK companies holding property in the UK, but the government will be consulting on extending the net. In general terms, the new rules will limit deductibility of interest as an expense to only 30% of EBITDA.
However, the draft legislation published last month already shows some significant ‘softening’ of the impact in relation to UK developer companies – interest on third party loans to companies carrying on a property rental business complying with certain conditions (eg as to security) will be exempt.
History indicates that the construction industry is the first to enter into a recession and the last to leave.
However, there is a much-publicised need for more housing. Post-Brexit, the government will doubtless be sensitive to the many and various influential voices that are lobbying for government support of the construction of new homes, both to buy and to rent. It will also be interesting to see how possible legislative challenges which were commitments prior to Brexit may now be ameliorated. In the meantime, let’s get on and build homes for all.