Sunday, 26 June 2016

What next for housebuilding in the "new" world

So we’ve hopefully now all shaked off our EU hangovers. Sadly I wish I could say we’ll not hear the words for a few hours but I fear it will be years before we stopping talking about it. Over the weekend I have reflected on the result and had some lively debate with friends, family and my 4 year old – the latter being the best debate ever – let’s be honest children ask the most brutally honest questions.

Not more than a week ago house price index data was released showing that asking prices were continuing to climb and had yet again reached a new record high with houses flying off the shelves (theoretically speaking). In an odd way London saw a price fall, but’s that a good thing.

The impact of a leave vote will take months or even years to truly realise yet that doesn’t stop people analysing. Zoopla was one of the first to note that house prices could drop by up to 20% - surely an amazing thing for those struggling to get on the housing ladder, yet devastating to those already on the ladder as LTVs plummet and interest costs rise. There must be a saying about what’s good for one is not for another. This reduction would take house prices back to 2011 levels and remove a lot of the exponential growth seen recently. The implications to Joe Blogg’s pension scheme will be unknown for a while, but I wouldn’t be surprised if it reduces marginally due to shattered investments in Persimmons, Barratts and Taylor – all three prolific dividend payers.

The instant effect on housebuilders was not unusual – markets do tend to panic but I wouldn’t have predicted a drop of c77% as Redrow experienced at one point before the industry bouncing back to around to 20-30% fall.

Step back though and the UK still has a significant under supply of quality homes in the UK and whatever your views on immigration this supply will not be amended overnight and most UK housebuilders have a strategy, according to annual reports and website announcements, to address the supply. Balance sheets were fixed over the last few years, debt has remained stable so this shockwave in the market should be temporary – though don’t expect growth in market capitalisation.

So where will we end up? Sadly I have no crystal ball. I think the falls witnessed on Friday were exaggerated but a fall is realistic purely due to uncertainty not aided by the lack of clarity yet provided by the Leave campaign – something that will hopefully reduce in time as further information is announced about what the deal will look like (sorry this may take 30 months!). My clients have already seen the impact with deals cancelled and developments pulled. House prices and transactions will be hit and a modest estimate would be at least 5% but hopefully not the 18% Remain suggested.

The areas of key thought need to be:

·        Skills – immigration was a key top to the campaign on both sides and it is clear from the weekend that a significant number of people feel marginalised. The industry relies heavily on European workers. They won’t suddenly be deported in fact Julia Onslow Cole, PwC Global Head of Immigration, provides some useful advice within the following webcast which should reassure to an extent: http://pwc.to/1sxfEFD . The answer, well we need to continue the investment in the UK workforce but look at ways that the EU deal can still allow this work force still to be used.

·        Investment risks – a number of development sites are only viable under a certain market scenario. We are unsure what will happen but there is a risk that some schemes will be scaled back or simply cancelled (which was seen on Friday – though largely from foreign investors running scared). Those with financial stability will prosper but those reliant on schemes will suffer and it raises the case for ensuring you diversify your risks.

·        Future of projects – what does this mean for HS2, HS3 and large scale residential/commercial developments. Again no-one knows but it would not be surprising if decisions became slightly delayed. This is the time where the Government needs to support the UK by investing in infrastructure. I am against austerity but can see rationale in certain areas – here is an opportunity to support industries by funding these projects still which in turn will create opportunities for housebuilders.

One thing is certain: nobody can say for sure what will happen, but those who have planned and created a strategy for this scenario will take advantage of the opportunity created. Many feel sore and bruised by the decision and many in the industry were strong advocated for Remain, however what we must now do is come together to reunite this great nation and provided stability that the markets need.

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 your week

Lee

Tuesday, 21 June 2016

EU referendum - short and sweet


Whether you are voting to stay or voting to leave it doesn’t matter – the key is that you vote and have your say! There is nervousness from all sides but to me and more broadly an entire industry is on tender hooks as they brace themselves through the current uncertainty and potential impact of which ever decision the UK takes.

The house building industry is clear – there will be pitfalls for both buyers and developers if a ‘no’ vote occurs. But is this simply not just because the whole EU referendum is drawing attention away from the severe lack of houses available. You can view Brexit as having little impact on general confidence levels as the majority of UK sales are to UK residents and the undersupply means activity levels are unlikely to be changed as demand and pricing levels remain robust.

There is the argument though that Brexit will impact overall investment (at least in the short term) – but more broadly you can argue labour supply. It is already short and the EU supplies a large amount of that supply which is desperately needed to ensure we push on delivering houses. If we remove this supply do we bring labour shortage right back into the issues arena.

To me the supply of labour is linked to an under investment in apprentices but was mitigated by migration of skills from the continent and further afield. Implications of Brexit could simply lead to tighter regulation and therefore damage construction activity – limit supply of skills and therefore further dampen delivery of homes. We simply wait in baited breath for the outcome so we can deal with whatever the outcome is.

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.

 Happy voting.

Lee

Saturday, 11 June 2016

Voting in and out for construction

Whether you are voting to stay or voting to leave it doesn’t matter – the key is that you vote and have your say but more broadly an entire industry is on tender hooks as they brace themselves through the current uncertainty and potential impact of which ever decision the UK takes. Vote Leave thinks it is entirely possible – and easy – to negotiate a ‘friendlier’ relationship with the EU; one based on free trade, with all the benefits of EU membership and none of the costs. If this pans out, gloomy predictions from prominent British officials and leading global institutions may, indeed, prove to be over-egged. But how likely is this?

The house building industry is clear – there will be pitfalls for both buyers and developers if a ‘no’ vote occurs. But is this simply not just because the whole EU referendum is drawing attention away from the severe lack of houses available. You can view Brexit has having little impact on general confidence levels as the majority of UK sales are to UK residents and the undersupply means activity levels are unlikely to be changed as demand and pricing levels remain robust.

There is the argument though that Brexit will impact overall investment (at least in the short term) – but more broadly you can argue labour supply. It is already short and the EU supplies a large amount of that supply. If we remove this supply do we bring labour shortage right back into the issues arena.

To me the supply of labour is linked to an under investment in apprentices but was mitigated by migration. Implications of Brexit could simply lead to tighter regulation and therefore damage construction activity.

But to be fair you have to ask “how likely is the Vote Leave” scenarios? A new relationship, once defined, will need to be ratified by all 27 remaining nations – an already challenging feat potentially made even more difficult by the wave of discontent currently sweeping across the Union. Negotiating a new relationship with the UK is unlikely to be at the top of many nations’ agenda.

So pressure on input costs, conversely, may increase. Near-term, sterling, already down by between 5% and 10% against both the euro and the dollar, would probably depreciate further following an exit vote, raising the cost of imported building materials – 60% of which come from the EU. The near-term outlook for wages is less transparent. Migrant labour forms an essential component of the UK construction workforce, accounting for up to 50% of total employment on some Central London sites. If free movement rights are quickly revoked, labour rates may come under increased short term pressure. Longer-term, changes to immigration policy could also have serious implications for our industry. The Vote Leave campaigners are seeking to address this one with a scoring system for people seeking to come to the UK. This one will inevitably need to be resolved early if the UK economy is to remain in some form of equilibrium, but I sense this would be possible, as the desire to do so would be strong.

I don’t hide that I am part of the Stronger In Campaign but I do respect people who are part of Vote Leave – my simple wish is that people do vote and that they take into account not only short term views but longer term views as well – you will only be around for a proportion of the time of whatever decision is taken so simply think about your children.

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.

Lee

Thursday, 2 June 2016

A new approach to affordable housing


The mayor of London could deliver thousands more affordable homes if central London boroughs were encouraged to funnel investment into low-cost homes in outer boroughs.

That’s the finding of new research from BNP Paribas Real Estate (BNP PRE), which accuses politicians of “skirting around the issue” of housing in the capital, and calls for radical changes in policy to address the affordability crisis.

By the time Boris Johnson left office, the average London house price had jumped by 56% over his term, the research shows. That’s a £170,000 hike, compared to an average wage increase of less than £10,000.

This has priced many out of the market, and pushed the need for affordable rental homes to levels that developers cannot sustain. The issue has been central to the London mayoral election campaign, and BNP PRE claims to have found a few solutions.

If the five most expensive London boroughs - Islington, Hammersmith & Fulham, Kensington & Chelsea, Camden and Westminster - together invested £500m of developer contributions for off-site affordable housing, they’d deliver 650 affordable units within their borough boundaries, the research says.

But if those boroughs invested the money in the five lowest-value outer London boroughs - Bexley, Barking & Dagenham, Newham, Sutton, and Havering - 2,600 homes could be built.

The main reason for the disparity is the high cost of development in central London.

For example, BNP PRE calculated that the £78m the developers of the Chelsea Barracks paid to the City of Westminster in 2011 in affordable housing contributions would have provided only around 86 units in the borough. But if that cash was invested in outer London, nearly 450 homes could have been built.

“These calculations, although relatively crude, point to a need for the new mayor to get the 33 London boroughs working together to decide how affordable housing supply could be increased through targeted investment of payments in lieu,”

The move would be controversial, however. Campaigners label any plans by councils to shift affordable housing to areas beyond their borders as “social cleansing”, and oppose what they say would be a Paris-like transformation of the capital, in which low-value housing is sent to the outskirts.

According to the research, if developers had access to just 1% of green-belt land in 10 outer London boroughs, 12,500 affordable new homes could be built. That would be just a fraction of the hundreds of thousands of homes London needs - but it would be a start, and could catalyse further development.

Both solutions are politically “unpalatable” but don’t be surprised to see them continue to crop up as the failure to tackle the housing supply crisis in the capital continues to drive up prices. Desperate times often call for desperate measures.

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