Investors and PRS moves out of London

The property market is riding high with cranes scattered across our city skylines but with the London investment market becoming saturated the focus is turning to the regions (cue the excitement) to create industry hubs across the nation – regional hubs so to speak. This investment is helping all around – the money is more speculative on areas such as retail development, for example Thorpe Park in Leeds. High levels of investment in commercial property, both from national developers and overseas investors, are resulting in increased asset management initiatives across the country. Occupier demand is such that clients are increasingly fast-tracking contract work.



This creates a challenge and it is pretty clear that the construction industry is under pressure and there is a need for the management of risk to ensure delivery on projects is prompt. The market is expecting construction inflation of around 6-7% over the next year or so driven by an under supply to the industry – this will self-correct over time as new entrants join the market. It goes back to a point a few weeks ago about the number of projects being delayed or cancelled ultimately due to costs – it needs to be expected by customers that the construction industry is still recovering and prices need to reflect the modern world not the world of four years ago. A key part of the process is subcontractor labour which is currently in short supply.



As a customer what can you do? Well think about the overall picture and relationship you have with the constructor – is the relationship strong as it may take some strain now. If you work with them on a number of projects think about this also in the context of price and delivery. Contracts that are subject to a fixed price now may come under pressure, which could lead to disputes, claims or risks to clients. The value of strong relationships with the supply chain should not be underestimated. Bulk buying and repeat instructions can be techniques to maintain relationships.



Think about the delivery of a program based on this – everything is under pressure, whether the bricks, steel and glass through to the utility providers struggling under the pressure. Obtaining quote, delivery and installation across this will need factoring in to any work program.



A number of people have asked me this week why PRS isn’t working outside London as well as inside. I don’t think it’s a question of where the PRS is, though being in London will undoubtedly help, but the skill set of the owner. Being a PRS landlord differs from commercial property or development to sell. You have more customers, more rents to collect and more people to demand on your services. You require or outsource a different skill set than you currently have and with it comes cost – simply eats away at the margin. The market will continue to grow I’m sure as people will fine tune models that work but it will come down to keen pricing and the availability of projects.

One million homes in five years is an ambitious target - England hasn’t regularly built that many homes so quickly since the immediate post-war years. In 2014 there was around 120,000 homes built and there are plenty of planning approvals out there and continually being delivered but how can an industry that is continually capacity light from a resource perspective deliver. The workforce of the construction industry is ageing. There is continued investment allowing for the next generation to come through but this does not cover the outgoing workers. The apprenticeship schemes in place will support the industry in the future but fail to meet current demand.

So what could be done? Firstly the government need to change a number of policies to deliver more housebuilding. This could include reforming the planning system – not because it is failing but more to make the process quicker to reach decisions. By allowing developers a pipeline allows for options to deliver more houses. It was welcome in July that Brownfield Housing Zones was announced but more needed. There must be more public sector land that could be released for develop or combining, for example residential developments on top of hospitals. One million figure is unrealistic. To get more homes built, the government and housebuilders need to work better together.

So the message of today is London and everywhere else are different. The London market has reached a point where investors are looking elsewhere and this is creating its challenges but also exciting times ahead. The PRS market which is starting to dip into the regions needs careful consideration to ensure that the delivery is beneficial to all parties.

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

Where would housing be under Labour?

Well, Autumn has arrived and the dark drizzle of evenings that will lead us into Winter no matter how hard we fight. Housing is something we should fight hard to get right – it’s an essential part of our lives.



A policy to build 100,000 council homes each year, well what would you expect from Jeremy Corbyn! I have to applaud him for doing something he believes in irrespective of the reaction from the market, because let’s be honest – developers aren’t going to be happy. The strapline behind this focus, which has continued since the general election 2015 is simply “a decent home for everybody” and in truth why should this not be the focus of all. We all want somewhere to call home, rather than the age old saying “It’ll do until we get somewhere better”.



The whole housing topic, unfortunately for the Government, is an easy target. The last set of promises were not delivered upon and very few believe the policies set forth by Brandon Lewis are achievable either but I don’t think this is about winning points – it is about doing the right thing, creating a community that benefits all of society. The best part to me of his speech was simply “Private rents out of control; a third of private rented homes not meeting basic standards of health and safety; the chance of owning a home a distant dream for the vast majority of young people. There’s no answer to this crisis that doesn’t start with a new council housebuilding programme”. I sort of lean towards parts of this view, I do think there should be a push on the public sector housebuilding as it will create homes in the right sector of the market but it’s not the only option.

So what else is on the agenda of the Labour party. John Healey, shadow housing minister, announced a “review” by Taylor Wimpey Chief Executive Peter Redfern. He has experience and is respected in the business but I don’t envy his challenge – determining and analysing the root causes of the housing crisis. Is it not supply and demand? Maybe that’s why I wasn’t asked to do the review. The report is due next year and comes a year after the Lyons Housing Review, which has largely been ignored. Wonder how much money went into publishing it?



Now it gets a bit sketchy when you say building 100,000 homes a year can make money for the Government but in all truth, why not if delivered properly? The discussion paper tabled by John Healey outlined that in 26 years building 100,000 affordable public homes to rent or buy a year will by lowering housing benefit payments. Could we not review the housing benefit payments rather than building the houses as well? I know they’re interlinked but surely that review should already be underway to save money.



Healey also published a discussion paper, in partnership with the left-wing think tank the Smith Institute, which claimed a programme of building 100,000 affordable public homes to rent and buy a year could pay for itself in 26 years through lower housing benefit payments, returning a profit to the Exchequer of £5.8bn over 30 years. Let’s take it a step further and boost council housebuilding by letting them borrow against their assets and push further developers on certain sized schemes for more social homes through the planning system.


Maybe between all parties they should sit down and talk and agree a bit of each side - they are all moving the right way and have valid arguments but maybe converging all the plans to create a plausible solution to benefit all (not just certain people).

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

Solving the housing position - some novel ideas

I was quite inspired reading about a competition run by New London Architecture which looked at how to solve the housing crisis, mainly in London but to be honest the ideas could be equally as applicable across larger cities (and some smaller). Below I’ve explored a few of the suggestions and also thought about my own:

• Housing over public assets: The portfolio of the Government is huge and easily surpasses even the largest REIT so the question is can we simply build on top of it? The idea is proposed to deliver up to 630,000 homes but building apartments over local schools and hospitals. Now to me this isn’t my ideal home, however given the local of public buildings, i.e. good access to transport, it would be ideal for first time buyers, second homes in the capital for those who live up North and affordable housing. This could also be rolled out practically anywhere. You would need some sort of incentive for the public sector – whether a new build or a significant renovation – but this could work.
• Right to replace: Every town, city and even villages has those older areas that could do with a renovation or replacement. The proposal submitted was that you have the right to knock down your home, sell half the site and build a new eco-home on the half you retain. The other half is then also developed – effectively you double the site. Two points on this – I love older houses, they have character and they have space which simply isn’t delivered on modern houses to the same extent. That said I don’t control the world so this would appeal to some people.
• Gap housing: It’s simple but not – you effectively build houses in the space between other houses. This was trialed and was found that 5 houses could be built in a 100m stretch of south-east London. No, not for me. Just the thought of 5 extra houses squeezed between 30 sounds horrific! Grand Designs has experience of showing how waste land can be converted into unique designs between terrace houses but to do this larger scale doesn’t sound like the solution.
• Water homes: We have a lot of it, whether the Thames in London or the canal network across the country. Why not make use of this by creating floating starter homes. Seems simple, works (unless you get water sickness) and can provide relatively cheap housing. But do you really want a floating home.
• Pop up housing: Take the land, pop up some stacked homes! Live in them for a small period of time, say 10 years, until the time is right to completely develop the site. Pack up the homes and move them elsewhere. Okay, this works in principle, quick and cheap housing but why not simple build a development on the land? If the crisis needs housing although stacked homes provides quick solutions it isn’t long term.
• Planning: Make it simpler, make it easier, reduce the time – however you word it this has to be a solution. The process can surely be modernised and streamlined to ensure it does its job – holds developers to account and contributes to the community – but doesn’t leave developments unsure of the yes or no for a long period of time.

There are options and we need to ensure that all options are considered further before anything is taken forward but I think they key is that developers, housebuilders and local government work together to find positive solutions to help those that need housing the most – social housing and housing for first time buyers (you know the affordable kind).

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

1,000,000 homes in 5 years....really?

With a week gone by since the Yorkshire Property Awards and one week until the Yorkshire Residential Awards, it feels like a time to be celebrating. Commercial units are fast moving to an under supply model and residential units are springing up for students through to large families but a question has been pondering on my mind recently, “Should the government intervene to aid housing demand?” It’s a broad question and one I wonder about often. The first point people usually say is surely they are intervening, but I’m talking more serious action.

They just announced they wanted 1,000,000 homes built in 5 years but HOW, I mean seriously HOW! Action could be as extreme as direct intervention through local government or using housing associations or indirectly by cheaper funding being available. The government can borrow at very cheap rates for infrastructure and therefore by using this power to aid development could speed projects up or deliver them on a much larger scale. But something has to happen above and beyond the current measures.

Between 2011 and 2014, the NHF reported that only 457,490 homes were constructed. Only slightly above 100,000 per annum and now we’re moving towards 200,000 per annum. I’m only 32….and I can’t remember a coherent housing policy, more a bolt on of theories and suggestions where some work and some don’t but while housebuilding sets ambitious targets the world of construction is hitting a bumpy road.

It’s not just residential facing a bumpy period. Recently it was announced, following research by Barbour ABI that the value of projects being put on hold had almost doubled in the last 18 months. Quite a contrast to an economy that is growing and a construction sector that seems to be recovering. It would appear that as the legacy projects are completing and prices are being submitted for new work (prices under current market price, not legacy price) that customers are simply stacking up the finances and saying no. Feels quite ironic for times to be good for a construction business only to be put on hold because they seek to increase their prices!

The market is changing and costs, particularly employee costs, are rising. This is thought to be reasonable double digit growth and ultimately this is going to be passed on to the end user. This is at the reasonable end. It’s public record that BAM walked away from a development with Intu over cost increases of 48% being un-agreed.

The rapid jump in activity in construction in 2013 seems to be manifesting itself now with the rise of construction contract prices, which is a real threat to the sustainability of construction growth. The question now is will this be a small bump in the road or a major up haul of the road network! Now sector forecasts indicate long term growth and I’ve lost count of how many cranes I can see not only in Leeds but across the region – the desire of some is seeing projects keeping going, I mean surely it will be okay?

There has been a prolonged period of lower costs so that is why it’s such a shock to see price rises of 15-20% - but is it justified? Well remember inflation returned a while ago now and there was little contractors did to increase costs (rather absorb the losses!) but maybe a scaled approach with an open honest approach from a contractors could help ease the changes.

So what we have is a commercial market that is improving yet more and more projects are being put on hold and a residential market that is overheating yet can’t keep up with supply. Eventually it will be accepted that project costs are increasing, not at the above rates initially but some happy ground in the middle. The residential market will not meet the targets set out by a long shot unless action is taken quickly.

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

How Government initiatives impact SMEs in construction

Another week has passed away and I actually heard someone say “it’s nearly Christmas” – how depressing, but even more so was then realising my wife has already started Christmas shopping! Depressing resonates in the industry at the moment with the consultancy framework changes and the affordable housing exemptions.

The consultancy framework sounds quite glamourous, surely most things do with consultancy in the title but the government’s troubled framework is about to be launched with 23 opportunities valued at approximately £2.9bn. Now the change of the framework from 6 to 23 is apparently to aid SMEs which I don’t totally get as they will still be competing with the large behemoth firms now I guess the upside would be boutique specialist firms that can really impress on a small section of the framework.

The whole framework has been fairly comical – first UK SBS left the management to CCS after controversially axing the procurement process and then there was the high court challenge by Turner & Townsend and then heavy criticism for no SMEs being awarded a place in the first round.

The framework will be split into 23 lots - one lot covering the whole of the UK, two covering overseas work, and 20 covering four individual disciplines across five UK regions. The current procurement timetable expects the framework to go live in March 2016 - nearly three years later than originally planned.

So that’s point one but then we have the small sites affordable housing exemption that was recently thrown out by the High Court. Building some sites requires a level of income, particularly a large number of small developments built by SMEs and to suddenly find out a certain percentage of the site needs to be affordable renders the site uneconomical! This scenario happened when recently the High Court made a landmark ruling that overturned the small sites exemption from affordable housing provision. It was a strange ruling given developments of 10 homes or fewer were excluded from the requirement to provide or contribute to affordable housing.



It does come as a somewhat humiliation to the DCLG who did inadequate consultation on the affordable housing provision. The small sites exemption was intended to speed up the planning process for housing, support local builders and reflect the difficulty of stacking up smaller developments. This ruling effectively renders many sites to potentially be abandoned.



So in the modern day where we should be encouraging our #SMEs there are two examples here of how they suffer. The framework at least has changed and will potentially help but as for the wider market for house builders there will need to be a revisit to whether a site would be viable without exemption from affordable housing.

 

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

The Government is moving (slowly) in the right direction on housing

I’m not very political and over the last few elections have flipped between who I vote for, focusing on the promise and past delivery. The Conservative government is pushing forward a radical policy agenda - nowhere more so, perhaps, than in housing and to me it is good to see that high on the agenda is home ownership (via various initiatives), holding housing associations more to account and getting rid of initiatives that added nothing. Everyone know about the right to buy policy but changes to zero carbon and removal of the housing association’s rent settlement were post-election surprises.

A recent PwC report showed that home ownership is going backwards as we enter generation rent (available PwC Generation Rent report) and is at its lowest level for a number of years – though people still desire to own their own home.

The Conservative manifesto pledge was to build 200,000 starter homes, sold to first-time buyers at a 20% discount to the market rate. The original thoughts around this was that the homes would be built on former industrial sites and surplus public land however this now appears to be a requirement heading for all “reasonably sized” sites, effectively the new “affordable housing” obligation on private developers. The details will be included in the Housing Bill, so let’s wait and see but sounds like a U-turn to me.

Housing associations are rightly concerned about right to buy. The track record for delivering more housing stock is low and if you increase purchases this will dwindle the stock altogether. An even worse problem and although statistics show the waiting lines for social housing is falling, that’s simply because people have been told they stand no chance and therefore removed from the list.

The push and drive of the Government has helped, don’t get me wrong, with the builders’ finance fund for example which has been designed to restart developments of between 5 and 250 units. Its main objectives is to help smaller developers and is open for draw down up to 31 March 2017 – get in while you can.


We cannot forget that housebuilding was at its lowest in a significantly long time and with initiatives such as Help to Buy and the reforms to the planning system under the National Planning Policy Framework, the housing market has returned. There is work still to do to increase supply to satisfy demand but one step at a time ey! You need more homes built for people who need them in places they need them. Is that too much to ask!

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

Solutions to housing but do they deliver

Over the past few weeks I have had the privilege of reading the submissions for the Variety Yorkshire Residential Awards and the one striking point is that whether you are a national house-builder, local house-builder, a PLC or a local SME that everyone is being increasingly innovate in how they deliver housing. Since 2014 there has been shift in the attitude to towards solving the UK’s housing supply problem and actually become a key political talking point during the 2015 election (though that feels a lifetime ago!). The overall crisis of affordability and ultimately supply continues to rumble but discussion around solution is becoming increasingly common.

 

So what do you tackle first? Well most people you talk to say the price, the market continues to rise ahead of wage inflation and those in London and to an extent the regions simply cannot get on the property ladder – not because of the banks but because the deposit far outstrips most twentysomethings savings. Affordability is linked to supply, while supply is low prices will rise. So how do you get close to building 250,000 homes a year?

 

• Help to Buy: Everyone has heard of this and to be honest it is performing well in driving housing sales. It was also good news that it has been extended. It is estimated nearly 40,000 homes have been sold under the scheme and supports first time buyers onto the property ladder. There is an argument though that although it has kicked started and invigorated the market it’s not solely going to solve the issue.
• Small developers fund (“SMF”): I’ve said before that national house-builders don’t need too much help as they already do things on such a grand scale that they must be doing something right. Small and medium house-builders however still struggle to secure financing. The SMF will provide loans that is hoped will unlock 15,000 homes but the life of the fund is too short to really kick start much and this needs rethinking as financing is the greatest challenge to a SME yet they have potential to unlock land that large house-builders deem unviable. In all fairness simply an extension of the funds life and greater promotion, even targeting companies would be the best idea.
• Garden Cities: We’ve done then once so let’s do it again. Sounds such a dream place to live, a garden city but in reality it won’t solve the problem particularly when the Housing Minister stated the Government is unwilling to show its support. Now I think if you throw support behind and select appropriate sites, i.e. those for commuting to London, Birmingham etc then you can create something special and the scale of them attracts the national house-builders.
• Increase density: You could follow suit with London where residential now is followed by the word “tower” – land is limited so simply build more. It works in London where there is a need for smaller apartments close to the busy business districts or for those who commute from the countryside but would it work in Sheffield, Leeds or Newcastle to the same extent. Doubt it!
   

There are many options that could help solve the current predicament but many suggested ideas are limited in the time available to them but only provide a short term solution with few offering large scale help. Created a drive behind public funded housing, like the good old days, seems an expensive but longer term answer. It needs funding to get it started but once the churn starts then it could have legs. All the above though miss out one person, the community. If a community don’t want a development they will do their best to stop it. Working with the community more closely from inception can mitigate this and allow developers and communities to better the community.

 

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

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