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