Flexible funding to meet local needs

Grant funding of affordable housing could be considered an investment where it can deliver long term savings on the housing benefit bill. But in practice, affordable housing grant also fulfils many other roles, including bringing viability to development in lower value areas and improving housing quality.

A more flexible and holistic funding regime – directing funding at issues like stock renewal, infrastructure and unlocking difficult sites – could be a more effective way of solving local problems in the housing market.

Priced out

Our analysis in 'Doing more with less' identifies a large and growing problem: more and more emerging households priced out of the housing market due to low incomes and rising costs. If we assume that all these households will form, how would you go about housing them all, and what would it cost?

Two scenarios are shown below. The first assumes that all of the 100,000 households are housed in hypothetical market rented housing, supported by housing benefit. The second assumes that we build enough social rented housing to accommodate all 100,000 households.

FIGURE 3

Scenarios for housing the 100,000 households in need of sub-market homes

 

Source: EHS, CACI, Land Registry, Rightmove, HCA SDR, 2011 Census, CIH (note that totals may not sum due to rounding)

New generation of social housing

In her party conference speech the Prime Minister announced an extra £2bn of funding over four years, some of which would be available for social rent. But to house 100,000 emerging households in this tenure would need funds of a different magnitude: £7bn each year.

Adopting this scenario would reduce the hypothetical housing benefit for the 100,000 households by £430m per year, with rents more aligned to the low incomes of those excluded from the market. And you get something tangible for your upfront subsidy in the form of new housing assets.

The housing benefit savings generated are much greater in London and the South, where the difference between prevailing levels of social and market rents is largest.

Local solutions for local problems

Grant from affordable housing programmes also helps make development viable in markets where the balance between build costs and sales values would otherwise preclude it. Clearly there are benefits to using grant in this way too.

Major development programmes can often be a good way of boosting the local economy in deprived areas, providing jobs and training, and supporting local supply chains. But it’s hard to make the case for an affordable homes programme where market, Affordable, and social rents overlap.

The Homes and Communities Agency (HCA) is in the process of consolidating its various pots of funding and taking a more active role in delivery. In future, housing associations should have the opportunity to bid for a wider range of funding packages and move away from the current restrictions of grant funding. This could help the sector to address local housing issues more effectively.

Political will

More flexibility would allow funding to be targeted at specific housing problems, with less of a focus on delivering maximum numbers of affordable homes. The political will to move to a more targeted approach seems to be growing.

The Prime Minister’s party conference speech alluded to a shift in government thinking, saying: “In those parts of the country where the need is greatest [the government will] allow homes to be built for social rent”.

A flexible approach would complement wider economic rebalancing policies, helping to remove the perception of poor quality housing options that is often cited as a barrier to relocating workers outside the south east. Treating housing as infrastructure, alongside transport improvements and investment in employment space would mean measuring the overall economic impact of funding or policy interventions against a range of indicators.

Building more homes should be a priority, but so should improving the quality of existing homes. Money spent should be judged on whether it's delivering the right housing solutions in the right places.

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An ambitious Northern stronghold

It’s an exciting time for Manchester. Seemingly immune to the destabilising influence of Brexit negotiations, property demand from Mancunian businesses and residents has grown steadily and looks set to continue on that trajectory. Manchester’s ambition and strong economic outlook were some of the key drivers behind the North West’s strength in our house price forecasts, and investment in HS2 will drive growth in the longer term.

If it is to meet that property demand and retain its competitiveness, Manchester needs to develop more property across all use classes. Here, we consider those uses nearest the top of the local agenda: residential, offices, hotels, and logistics, focusing on the city centre within and around the inner ring road.

 

Gaps in the market

Manchester’s residential pipeline may be large, but it’s not scary – the 7,000 homes identified under construction in the city centre make up just over two years of the city’s need. Those schemes are also being targeted at a range of occupiers, from owner occupiers to young renters to students, which will help the market to absorb this accelerated level of supply. However, we do see potential risk in the concentration of new supply at higher price points, where the depth of resident demand is shallow. Developers may find their homes slow to sell or let if they keep competing to drive the biggest premium.

Demand for Grade A office stock in Manchester is so high that it’s spilling into secondary stock, pushing up rental values there. We are also seeing lower grade office stock eroded by conversion to other uses, leaving affordable office supply as thin as the graphene Manchester invented. This means that while 71% of office demand in Manchester is for stock below £25/sq ft, just 59% of available supply is at this price point. Serviced offices and “light-touch” refurbishment will help bring in more affordably priced stock in the short term. Longer term, we expect to see the core office market expand into areas previously seen as fringe.

Hotel development in Manchester and Salford is finally starting to meet supply, and the pipeline looks strong for the decade ahead – if all the beds in the pipeline are completed, that will equate to a 20% increase in supply by 2020. With supply and demand in balance, we expect revenue per available room to grow less quickly. This will give hotel operators less wriggle room in their margins.

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Market movers

Since the late 1990s, the residential investment market has been almost entirely associated with the buy-to-let investor. Rightly or wrongly, the ills of the UK housing market – most notably the difficulties faced by first-time buyers – have been laid at their door.

The summer budget of 2015 marked the point at which politicians sought to discourage buy-to-let investment through tax policy. And the squeeze continues as mortgage regulation spreads across both small-scale and portfolio landlords. Interest rate rises and progressive cuts in tax relief will limit investor opportunity.

According to UK Finance, the number of buy-to-let mortgages granted for purchasing a property was 75,300 in the year to the end of August 2017 – ˆ47% lower than in the year to March 2016. The growth in the number of outstanding buy-to-let mortgages is lower still, at just 24,800, and there is evidence that some investors are shedding stock as shown in the graph below.

FIGURE 2

Feeling the pinch Low growth in the number of outstanding BTL mortgages suggests stock is being sold

 

Source: Savills Research, UK Finance

Irrespective of the support provided by the Bank of Mum and Dad and Help to Buy, little has changed for the deposit-constrained first-time buyer and the demand for rental stock will continue to grow.

Cash investors, however, remain far more active. The quarterly stamp duty land tax statistics suggest that in the year to September 2017, the additional 3% surcharge was paid on 245,000 purchases.

While some of these will be second home purchases, people buying for other family members or people buying their new home before selling their old one, the majority will have been investment buys.

Looking to 2018 and beyond, the decline of the mortgaged buy-to-let investor will open things up for the growing multifamily or build to rent market, led by the likes of Sigma and institutions such as L&G, M&G, and LaSalle, who have contributed to the delivery of more than 17,000 units so far.

At the end of the third quarter of 2017, our joint research with the British Property Federation showed that there were almost 79,000 such units in the development pipeline, a number that has increased by 40% in just six months. Of these, some 24,000 are under construction in a rapidly evolving sector that has embraced offsite construction and is rapidly changing the nature and range of rental options available to tenants. All of the evidence suggests this will gather pace through 2018.

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Housing market activity should slow 'modestly' as unemployment and mortgage interest rates are expected to remain low, says Nationwide

What’s the latest?

House prices fell by 0.3% in February, knocking £1,350 off the typical property’s value.

The slide, which followed a surprise 0.8% rise in January, left the average UK home costing £210,402, according to Nationwide Building Society.

The dip pushed the annual rate at which house prices are rising to just 2.2%, compared with 3.2% in the 12 months to the end of January.

“Month-to-month changes can be volatile, but the slowdown is consistent with signs of softening in the household sector in recent months," said Robert Gardner, Nationwide’s chief economist.

Why is this happening?

Richard Sexton, director of e.surv, said that while it was good to see house price inflation rising at a, "more sustainable level, limited supply continues to act as a bottleneck, squeezing potential buyers out of the market".

The drop in prices follows weak activity in the housing market as potential buyers bide their time.

In December, the number of mortgages approved fell to their lowest level for three years, while figures were also subdued for October and November.

The Royal Institute of Chartered Surveyors has also reported that new buyer enquiries have been weak in recent months.

The slowdown is also consistent with recent signs of softening in the household sector, with retail sales relatively weak over the Christmas period and into the new year, while consumer confidence indicators suggests the squeeze on household incomes is continuing to take its toll.

The overall situation suggests consumers are adopting a ‘wait and see’ approach and avoiding making major purchases, such as a house.

Who does it affect?

The cautious mood among consumers is exacerbating the current shortage of properties for sale, as it is deterring existing homeowners from trading up the housing ladder, making it harder for first-time buyers to find a suitable home.

But other data suggests there continues to be significant regional variations, with market activity higher in areas where house price growth has been less strong and affordability is not as stretched.

It is also important not to read too much into just one month’s figures, as there does tend to be volatility on a month-to-month basis.

Nicholas Finn, executive director of Garrington Property Finders, said January's jump in prices, "turned out to be a blip rather than a turning point, and the market is settling back into its pattern of modest growth. But for all the sluggishness of price rises, this is far from a frozen market. Realistically priced homes are finding buyers quickly."

Sounds interesting. Tell me more.

Going forward, Nationwide said the performance of the housing market would be determined by developments in the wider economy and changes to interest rates, as well as any developments relating to Brexit.

It expects subdued economic activity and the ongoing squeeze on household budgets to exert a modest drag on both house price growth and market activity.

But it added that housing activity was likely to slow modestly, due to ongoing high levels of employment and mortgage interest rates that were likely to remain low by historical standards.

At the same time, the lack of homes on the market would act as a support for prices.

Overall it expects property values to remain broadly flat, with a marginal gain of just 1% over the course of 2018.

Top 3 takeaways

• House prices fell by 0.3% in February, knocking £1,350 off the typical property’s value
• The slide, which followed a surprise 0.8% rise in January, left the average UK home costing £210,402
• The dip pushed annual house price inflation down to 2.2%, compared with 3.2% in the 12 months to the end of January

UK residential development land

UK residential development land

25 January 2018, words by Savills Research

Land values are growing faster than average in the North and Scotland, while housing associations are increasingly competitive in their land buying with strategic land becoming popular

■ Land values are growing faster than average in the North, where we forecast higher than average house prices in the next five years. Investment by Homes England is supporting development in this region, helping to increase the number of developers in the market to meet local housing need.

 

■ Housebuilders have enjoyed a relatively benign land market recently, thanks to limited competition and a growing number of consents being delivered. Unless land supply continues to grow, this is likely to change as more developers, including housing associations, are now competing for sites.

■ Major housebuilders are replacing land they have built out, sourcing more permissioned land from their own strategic pipelines, focusing on controlled growth. This has resulted in slow growth of greenfield land values (1.7% annual growth).

■ Medium-sized housebuilders are buying larger sites, increasing from an average of 72 plots per site in 2016 to 87 plots per site in 2017. Housing associations have become more competitive in the market, refining their payment options.

■ Strategic land is a focus for a range of developers and investors. In the last year, Savills was involved in the sale of several strategic land portfolios, totalling 60,000 plots. The major housebuilders are buying more of this longer-term land.

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Manchester leads the way

In the past year, urban land values in Manchester rose 24%, compared with 4% for the UK as a whole. Strong house price growth in this relatively affordable market has supported the increase.

House prices in Manchester rose by 8.6% in the 12 months to October 2017, more than double the national average of 4.2%. The market has been gaining momentum with greater belief in the future for the city as development continues.

There have been more land buyers bidding for sites, including housing associations who are bidding competitively on sites which were previously only of interest to the PLCs.

 

Source: Savills Research | Notes: *12 months to December 2017. **12 months to October 2017

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Majors continue measured approach

Major housebuilders are replacing land they have built out, sourcing more permissioned land from their own strategic pipelines while focusing on controlled growth of completions. More consents and relatively low numbers of developers compared with before the global financial crisis, means the land market remains relatively benign.

In the year to June 2017, 16% more consents were granted in England compared with the previous year. However, there are fewer developers, with only 53% of the number of builders currently registered with the National House Building Council (NHBC) compared with the average between 1995 and 2007.

As a result, greenfield land values remain relatively flat. Values rose 0.1% in the last quarter of 2017, taking annual growth to 1.7% – in line with 2016 growth of 1.8%.

The land market therefore remains benign, with land value growth remaining below house price growth on average.

The major housebuilders have been able to buy land at or above their hurdle rates. In its annual report, Bellway stated: “We will continue to acquire land which meets or exceeds our acquisition criteria”. Meanwhile, in its latest trading update, Barratt said: “The land market remains favourable and we have secured attractive land opportunities which exceed our minimum hurdle rates.”

Some 25% of Barratt’s completions in the last year have been on land from their strategic pipeline. Savills sold 8% more plots year on year to the major housebuilders between 2013 and 2017, reflecting the measured growth in land buying.

Most of the major housebuilders are planning for controlled growth in completions. Completions by eight of the PLC housebuilders (those with published data for 2017) increased by 6.1% on average between 2016 and 2017, in line with growth over the previous two years.

FIGURE 1

Recovery rate Land values have grown more slowly than house prices since the global financial crisis

 

Source: Savills Research, Nationwide | Note: Land values exclude London

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Look north for greenfield growth

Over the last 12 months, greenfield land values in Scotland and the north of England have grown faster than the national average, increasing by 4.2% and 2.7% respectively, compared with 1.7% for the UK.

House prices in these regions are more affordable and we forecast them to grow by 17-18% over the next five years, compared with 14% for the UK.

Investment by Homes England (formally HCA) has supported developments across the country. According to Savills agents, investment in sites in the North has helped grow confidence in the development market.

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Diversity drives competition

Savills agents are seeing more developers becoming active in the land market.

There is competition for sites across the market from medium-sized housebuilders, developers and housing associations, supporting land values and pushing them up in some areas.

Medium-sized housebuilders bought 54% more plots through Savills in 2017 than in 2015 (10% more than 2016), mostly through larger than average site sizes.

The median site size bought by medium-sized housebuilders through Savills increased from 72 plots in 2016 to 87 plots in 2017. This reflects their continued growth supported by better availability of finance.

London developers have been moving beyond the capital, supporting or pushing up urban land values in markets such as Woking, Guildford and Chelmsford.

These developers tend to be building apartment blocks targeted at people working in London who are looking for more affordable homes outside the city.

Across the UK, urban development land values increased by 0.5% in Q4 2017, with annual growth of 4.0%, more than double the growth in greenfield land values.

Larger housing associations are becoming more active in the Oxfordshire-Buckinghamshire area, along with other SME housebuilders. This area is particularly attractive for several key reasons: its connectivity to London and other strong employment markets; its location beyond the London green belt; and government support for strategic development in the Oxford-Cambridge corridor.

To maintain relatively benign land market conditions with additional developers, more consents will be needed.

FIGURE 2

Urban generation Urban land value growth continues to outperform greenfield land, albeit from a lower base

 

Source: Savills Research

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Strategic focus

Strategic land is being sought by a range of developers and investors. In the last year, Savills was involved with the sale of several strategic land portfolios, totalling 60,000 plots.

Among the major housebuilders, Bellway acquired 9.5% more strategic plots in 2017 than 2016, while the value of Crest’s strategic land increased by 16.5% between 2016 and 2017.

Acquiring strategic land continues to be a key strategy. Barratt plans to continue to build 25% of its homes on land sourced from its strategic pipeline while Linden aims to get to similar levels by 2021. Relying more on strategic land allows the major housebuilders to retain greater control over their land pipelines and maintain margins, albeit there is planning risk involved.

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Government support

In the Autumn Budget, the Chancellor announced new measures for supporting housebuilding to reach delivery levels of 300,000 homes per year in England.

A focus of the Government’s plan is the Oxford-Milton Keynes-Cambridge corridor. If the area is to maximise its economic potential, up to one million homes will need to be built in the corridor by 2050.

It is likely that at least one of the new garden towns proposed in the Budget will be within this corridor to support such growth. The Government has also agreed a housing deal with Oxfordshire to target delivering 100,000 homes in the county by 2031 in return for a package of support for infrastructure and economic growth.

Much of the land around Oxford is already being promoted, and landowners will be seeking development partners in due course.

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Return of the barn conversion

The fashion for converting barns into dwellings is nothing new: it originated in older villages more than a century ago. In those days access to building materials was limited, so they simply reused existing buildings where possible. 

Barn conversions became more established in the latter part of the 20th century. Many of the examples we see today date from the 1990s, when there was a strong interest in heritage buildings and rural living. More agricultural buildings were becoming disused and therefore were cheaper to acquire, and this, coupled with the large living space they offered, made them desirable assets.

The trend for converting barns began to tail off towards the end of the 20th century, by which time many of the most desirable buildings had been snapped up, leaving prospective buyers with more complex structures in more secluded areas. 

A subsequent push towards ‘sustainable development’ added further to the decline in interest as it made it more difficult to attain planning permission for conversions. This is still the case in some high-demand areas such as the south of England and in protected landscapes where the history of the area needs to be preserved. A flood of newspaper articles last year also claimed that potential buyers were being deterred from converting barns by popular TV shows which portrayed the process as costly and difficult.

However, current government policy is in favour of barn conversions. Permitted development rights mean that barns, even new ones, can be converted into a more modern style, often incorporating steel, concrete and glass, without the need to apply for planning permission. And while the UK is suffering from a housing shortage, it would seem sensible to utilise these disused buildings and help to support the rural economy at the same time.

Barn conversions, whether complete or not, still generate a lot of interest among buyers and particularly families. They are normally period, character properties, ranging from traditional red brick buildings to quirky Dutch barns, and while they are rural they're not isolated as they often form part of a cluster of buildings. 

Barns also tends to have the ‘wow-factor’, with vaulted ceilings, beams and galleries, which is why many people choose to convert separate barn buildings into entertaining space as well. Additionally, when it comes time to sell barn conversions can command a premium, based on £ per sq ft, due to their generous volumes.

For those looking for a rural idyll but don’t want a project, there are a number of barns on the market where someone has already done the hard work for you. If you are looking to convert your own disused barn it may be harder to find a property which has yet to be converted, but when you do the rewards are great. 

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