Sunday, 31 January 2016

Let's talk housing (for a change!)


A few years back I worked alongside one of the nicest people I have ever met. Since then she has returned to Hong Kong but we keep in touch and every year I am reminded of the next Chinese New Year – next up is the Monkey (or as described to me, the cheeky monkey). It is also deemed the unluckiest year – is this a sign of what 2016 will bring for the housing and property market?



Let’s talk housing first (for a change) – 200,000 starter homes a year is the target set by the government. I am not psychic but I think we missed the target for homes in total, let alone affordable, last year so it feels a bit ambitious. So the details of starter homes is still unclear but it will involve a broader definition of affordable homes (yes the ones that cost £400,000 + and still deemed affordable by the government) and a discount of 20% to market rate – which is probably still too expensive, remember the market rate is a little high at present! But is this really the answer or are there alternatives.



There is an argument that housebuilders should simply build more but let’s not forget they are a business that wants/needs to make money – yes the availability of land determines housebuilding but so does the profit margins. So far this year Persimmon and Taylor Wimpey have showed that 2015 certainly was a good year with increased revenues, completion, margins and selling prices. Only recently the Guardian newspaper analysed that the 9 biggest housebuilders who between them had enough land to build c615,000 homes (3 years supply if we were building enough).

The above to me suggests the planning process is working to an extent given approval has been obtained for that many houses. There is still a point that S106 agreements are time consuming and the continually changing landscape and process isn’t helping. Housing delivery in this country operates largely within an open-market economy and as such it would not be contentious to suggest that it is profits and profit margins that determine the numbers of houses being built. And then we’re back where we started because to get margins up means either costs come down which is unlikely given builders are struggling to get inflationary increases or price goes up in a market already deemed too hot. I certainly don’t agree with any form of relaxation of the green built. There is sufficient brownfield land available without impeding on our natural beauty.

In late 2015 the government announced plans to directly commission small developments on public land which was good news indeed, however gaining access to land is only one piece of a much greater puzzle – once the land is available, the development needs to be funded and there is the problem, securing finance! Securing finance and accessing the right skill levels is yet again challenging the industry and creating setbacks.

How do you support small builders though? Provide specific funding to specific people – almost like a means test for companies would create more red tape but at the end of the day larger housebuilders cannot that the onus on meeting the UK housing demands. To support this industry, there needs to be conversations and interaction with lenders, maybe via a guarantee scheme whereby the government provides security to lenders so that they fund small developments. The situation also allows other sources of finance to step forward.

From a commercial property side 2016 should bring an increased focus on student accommodation, hotels but also healthcare and shared offices. A prime supporter here is the Assura rights issue in late 2015 to fund medical property acquisitions and the proposed acquisition of Priory Group.



There is a continued shift to smaller capital cities or regional cities like Birmingham here in the UK. With abundant equity in most markets, and debt flowing relatively freely there is still an incredibly positive view on capital flows for 2016. Equally interest rates remaining low results in many pension funds, sovereign wealth funds and private equity investors still finding the difference between European real estate and bond yields compelling. 

So the year of the monkey will bring many things to many people but personally I think the housing market still needs addressing urgently but it needs to be a solution that works with all parties to meet this ever concerning habitation point. The commercial world will no doubt have breathed a sigh of relief with news the rates won’t increase until 2017 but I think money flow will change from last year and be pumped into new cities and industries to spread the risk.

 

Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to property and construction.

 
Enjoy the rest of the day

Lee

Thursday, 21 January 2016

What will happen to the property market in 2016?

We are now approaching the end of the first month of 2016 and you can’t help but look forward to the year ahead.

Housing

2015 ended with two questions – what to do about UK housing and the perennial issue of whether house prices will go up or down – but 2016 will bring so much more than this. The key question to me is following the US Central Bank’s decision to raise interest rates when will the Bank of England follow suit? Well that and the changes to stamp duty which will make those second homes or buy-to-let homes that little more expensive.

Over the lifetime of the younger generation they have become accustomed to the record low of 0.5% for the Bank of England base rate – now seven years! So this year may bring a big shock to people. There has much discussion about when will the rates rise, in fact for nearly 2 years people have been saying rates will rise, so will 2016 be any different?

For its part, the Bank of England continues to sit on the fence, effectively saying "wait and see". My view was  that in Q3 this year we’ll see the first 0.25% rise with a further 0.25% in Q4 leaving us this time next year standing at a 1% - not a view shared bythe MPC who have said no rises until 2017. But it makes sense, the economy is healthier and a gradual increase shouldn’t put too much strain on growth.

For the housing market 2016 will bring ups and downs. The historically very low mortgage rates have made large mortgages affordable. The Help-to-Buy scheme has kept house prices and sales at the top end but all of this has also created scenarios where people own houses they probably can’t afford when rates move back to a more historic norm. The changes to buy-to-let properties coming will no doubt mean a rush for purchases before the end of March. So expect a buoyant Q1 followed by prices easing off thereafter, but let’s be honest we are not talking a cliff but a small step!

Commercial property

The outlook for capital markets in 2016 is very positive which will ultimately influence the investment made into strategies over the coming years. There is also an increase in the availability of debt and this is something clearly coming across in the regions as corporate plus alternative lenders seek to capitalise on the market. A rise in interest rates will impact the sector but ultimately it will come down to how much risk was taken on. Let’s be honest if you are excessively geared with secondary assets then rate rises will no doubt see your end but that isn’t the market we are in. Sensibility has arisen over the last few years and yes it will increase costs but plans are in place, whether low LTV, interest rate swaps or even no debt, to mitigate this risk.

There is a significant undercurrent of caution across Europe as a result of geo-political issues, political uncertainty and economic decline elsewhere. Spain is becoming more bullish with Germany and France expected to do better than they did in 2015.

To me the commercial market will see two key developments in 2016 – a decline in the availability of prime assets but the opportunity to develop the next primate asset.

Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to property and construction.

 

Enjoy the weekend

Lee

Thursday, 14 January 2016

Looking forward to 2016


Wow, how did it become mid-January already? Having spent a couple of days in Hull one thing you notice is the development – it’s not large over-sized cranes but small developments spread across the City with the new C4Di building standing proudly along the dock. Quite reassuring that development fever spreads from Liverpool across to Hull – a true powerhouse is being formed. Further this supports the latest Markit/CIPS survey which shows commercial work output recovering from the November seven-month low.

Those who believe the bubble has burst need only consider these results. The UK economic conditions are continuing to boost and support the demand for commercial construction projects. The unfortunate flooding that has devastated the North will also provide a large number of projects as people seek to rebuild communities and the Government surely starts investing in infrastructure projects to prevent this happening in the future – maybe use Pickering as an example.

Housing activity also increased from the 29-month low seen during November and things seem to further be improving with Barratt announcing last week that 18 Yorkshire sites will opened creating a significant amount of jobs and benefits for the economy. Hopefully the houses and developments will be more like their Derwenthorpe site than Saunderson Gardens - mass housing doesn’t have to be bland!

The boost to housing provided by the Government planning to sell publicly-owned sites with planning permission will be a boost to the SME housebuilders across the country. The policy, designed to enable quality homes to be built quicker by small housebuilders, will create thousands of homes. However, the challenge is that there was not really any clarity by the Government on how the scheme was any different than what is already in place (other than good marketing). To me it seems simply the only difference is planning permission (outline or full is not yet clarified), which actually for an SME would be more attractive as less risk the scheme is rejected by planning.

UK construction companies finished 2015 in a positive fashion with commercial buildings the main engine of growth, with this area of activity expanding at the strongest pace since autumn 2014. Across the UK construction sector I have a strong degree of optimism about the outlook for 2016. The challenge for 2016 is improving margins and finishing the legacy contracts still heightened in risk but also a concern about tax and the lack of reform to the planning system.

The government’s shake-up of stamp duty is not the only tax-related issue. Taken together with the changes to tax on dividends and the community infrastructure levy, there is growing concern the chancellor is looking to raise more money from business and that the tax burden could increase further. Planning regulation also remains the major bugbear of the industry and simplification of the planning process is needed.

Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to property and construction.

 

Enjoy the weekend

Lee



 

Friday, 8 January 2016

One last look back at 2015

The Christmas period was the perfect time to catch up with family and friends, enjoy the seasonal weather and enjoy some good food and drink (maybe a bit too much of the latter ones!). It is also a time to reflect. Kate and I often think about everything we are thankful for and 2015 was no different. I personally also reflect on property – for my own and for my job. The property industry in 2015 was pretty exciting and full of ups and downs. Maybe this is because 2012 – 2014 were fairly sedate or maybe simply because it was far my exciting. I’d like to think the later.
  • 2015 clearly demonstrated that a lack of capacity and certain markets becoming too hot meant that the growth in the year was dampened off a little – particularly given the increasing cost base – a clear example being the halting of the redevelopment of the Harlequin shopping centre.
  • 2015 was the year China entered the UK big style. Numerous projects including a £6bn investment in the Hinkley nuclear power station and much more. As I mentioned in a previous blog this should be embraced but I would not be surprised if in 2016 we see a large contractor fall under Chinese ownership.
  • Housing has had its ups and downs but the Government, bless them, are trying to keep it going up but there has been a wobble with the struggle of Bovis – 2016 could see the skills shortage come to the forefront for housebuilders as they struggle to have workers on new sites. With policies designed to reduce planning regulations and encourage housebuilders to build more the Conservative Government are doing something but when the numbers are totted up I’d be surprised if we built more than 150,000 homes in 2015 (a clear 50,000 short of minimum required) and the gap between earnings and deposits continues to grow – so are we really in a better place?
  • Housing associations had a bad year with a list of government policy changes following the May election. There is a need to let housing associations be just that rather than a housing company, which seems to be where they are currently heading.
  • The skills shortage became worse in 2015 but did sit pretty on the industries agenda. Now a large number of businesses have begun to invest heavily but competition means that the highly skilled are being poached quickly. The apprenticeships levy may help but it’s a little unclear how much will benefit the construction industry.
  • The 2015 election took up a lot of the headlines. I remember back to the controversial conservative policy of extending the Right to Buy to housing associations and the potential blip of the Labour policies (which in hindsight don’t really matter given what happened!) in stopping housebuilders land-banking and the infamous mansion tax. It has been an interesting post-election period as a number of construction policies faded into the night: the chief construction adviser, the zero-carbon homes policy, the Green Deal, subsidies for renewable power – all cancelled in the first four months. He may not be green but devolution and infrastructure are certainly advancing for the better.
The end result was a market place that saw good growth, that could have been better if there wasn’t supply issues but being positive would have meant a peak of the market much earlier if growth wasn’t dampened. 2016 will present some interesting opportunities but also challenges with a key point being addressing the need for new homes.


Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to property and construction.

Enjoy the weekend
Lee