Jonathan Bunt: Sacrifices needed to launch large-scale housing developments
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Housing has become the Cinderella ministry in government. Statements at a recent conference suggested local authorities will have to consider different approaches if they are to get large-scale developments off the ground.
Sacrifice. That was a key word from the recent Chartered Institute of Housing (CIH) conference. If local authorities want to develop large sites, they will have to change their approach and potentially give up an element of the up-front capital receipt to maximise their overall financial return from land.
Oh, and sadly, when it comes to local authorities who want to build more council-owned homes in the immediate future, there was little encouragement.
The themes emerged in the closing conference keynotes delivered by Dominic Raab, the now former minister of state for housing and planning, and Sir Oliver Letwin, chair of the independent review of build out. Each offered teaser announcements ahead of publication of the social housing green paper and the report of the review later this year.
Thorns
Raab continued to press home ownership and to advocate the merits of the policy of right to buy (RTB) — a thorny topic across the conference — as an enabler for the aspiration to own your own home.
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In doing this, Raab rejected the CIH’s call to suspend RTB but acknowledged that the diminution of council stock was an issue. There were allusions to potential measures in the green paper to boost the capacity of local authorities to replenish their lost stock, but these went no further than to “keep under review” the numerous requests to reconsider the housing revenue account debt cap.
There was, nonetheless, a continuation of the gradual embrace of the rental sector and a championing of the build-to-rent sector as an important part of the solution for increasing housing supply.
Alongside this, with the impact of Grenfell clearly apparent, is a desire to give greater support to tenants, and those in social housing can expect this to be a central tenet of the green paper. Raab also backed the CIH’s initiative to end the stigmatisation of social tenants.
His final theme was on innovation in the housing market and restated financial and policy support for modern methods of construction (MMC).
Such methods could have a significant impact on the speed of delivery for new homes and, he argued, could in time act as a mitigator to any Brexit impact on the construction industry’s ability to deliver the volume of houses needed.
Few homes
The brief for Letwin’s review was, in simple terms, to get underneath why so few homes are built compared to the land allocated and permissions granted. In simple terms: Are developers land banking?
The technical answer to this, according to the early reporting of Letwin’s review, is no, they are not.
What is occurring, however, is that developers are offering very similar homes, in very similar styles so they only build out as many as they believe they can sell at the price that delivers the required level of profit.
This is the absorption rate for new homes and, crucially for local authorities, it also dictates the rate at which new affordable homes are built.
So, as noted, this is not technically land banking — which is speculative purchase of land with a view to make substantial profit on its future turn — but, in reality, it is virtually the same thing for local authorities grappling with rising waiting lists and homelessness costs.
Perhaps, therefore, it is more accurate to say developers are not land speculating but the jury remains out on practical land banking. There is a clear mismatch between the developers profit and a need to increase the housing supply in some areas.
At the heart of the issue is the price paid for land by developers because, once that is locked in, the developer has to sell units at a specific price and that, in turn, dictates the build-out rate.
It is argued that developers too often overpay for the land they acquire and that has two results: The first, as noted, is the lower than desired build out rate; the second is the frequent renegotiation of the developers affordable housing provisions on the grounds of viability, i.e. maintaining the profit margin.
Letwin only alluded to potential solutions at this stage but, at their heart, was the need to broaden the concurrent housing offers to the market by developers.
This is a broadening of styles, sizes, tenures, and so on, away from what a former colleague once referred to as red brick “anywheresville”, two-to-four bedroom homes for private sale.
Shift
Whilst there is some disruptive impact on the market from local housing companies and development companies, there needs to be a much more seismic shift.
There is a potentially significant role for councils and Homes England plus One Public Estate, if it is given some real teeth by the Cabinet Office on land assembly.
This highlights a need for additional capacity and, crucially, methodologies for parcelling large sites, perhaps with multiple developers, to enable different offers with different absorption rates.
This would enable far more homes, and many more investment opportunities, to be brought to the market instead of the current generally slow build out of large sites.
It also indicates that councils need to consider the financial benefit that can be achieved from held and assembled land in a different, and broader, way.
Traditionally, the general aspiration has been to maximise the capital receipt but, as noted above, this can have a detrimental impact on the build out rate.
Instead, by splitting sites among multiple developers and shaping different tenures on them, the initial receipt may be reduced but the local authority may achieve a better financial outcome.
For example, the faster build out overall will increase housing supply, including that of social and affordable rented homes to enable a potential saving on temporary accommodation costs, and generate a larger increase in the local tax base. There may also be the scope for revenue generation from rented-out homes and future receipts from the staircasing of shared ownership homes.
The appetite for funding housing development is vast and the potential for new homes, offering both a financial return and revenue savings for councils remains high. Once again the constraint, and the need for up-front investment or partnership working, is the human capacity to bring the right type of offer that can disrupt the large developer absorption rate.
Jonathan Bunt
Jonathan Bunt advises local authorities on investment, development and funding opportunities, particularly in relation to housing and regeneration. He is a former strategic director at London Borough of Barking and Dagenham.
Jonathan is on the advisory board for the Housing & Regeneration Finance Summit organised by Room151 and Social Housing Magazine.
