Philip Barnes – Blog


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CPO, LPEG, AND THE PLAN LED SYSTEM

Just been wading through the recent DCLG Factsheet on CPO and specifically the paragraphs relating to the reiteration of the “no-scheme principle”. My conclusion is that it appears to confirm that the plan led system effectively kills off the possibility of major public sector led new settlements.

This is because it prevents land being bought by the state at existing use value and then being subject to the process of securing consent and providing infrastructure, prior to being sold on at housing value.

Why so bold?

Firstly because the plan led system is exactly that – the plan leads everything else in relation to land and planning. So land for a new settlement to be delivered will firstly need to be allocated as such in a plan before it can be considered suitable for acquisition and consenting by the state. That plan will confirm the value of the land as housing land. That is the price the state must pay.

Any other (off plan) approach would be pure land speculation by the state. Namely betting taxpayers money on the outcome of the quasi technical local plan process. In effect gambling that the state’s preferred site better meets the tests of sustainability and soundness than any others. Something that private companies do rather than taxpayers.

Secondly because the Factsheet is so crystal clear on the matter. Three quotes stand out:

“The Government is not trying to change the existing fundamental principle that compensation should be based on the current market value of the land”

 “Compensating owners at less than market value is inherently unfair and us unlikely to be compatible with the European Convention on Human Rights”

 “….actual or prospective planning permission can be taken into account when assessing the market value of land…… including any hope value for future development……”

Like many planners I can see potential merit in the state attempting to repeat the successes of the post war new towns by capturing land value and then delivering infrastructure and new settlements alongside housebuilders. The inability to do this is one of the reasons why I was so disappointed that the LPEG report failed to consider the overall pros and cons of the plan led system. Rather it simply accepted, without critique, the notion that Local Plans (which essentially cap housing numbers and restrict new homes delivery to the sites coloured brown on a Council map drawn 10 years ago) are the best way to address the housing crisis.

I recall the time when local plans were positive growth documents relating to areas of housing and economic growth. They weren’t district-wide. Outside those local plan areas land use decisions were made by planners, informed by planning judgment and criteria-based policies supported by the designated areas of development constraint (now called Footnote 9 areas). Whilst my views may be stuck in the past where is the current innovative thinking on an alternative model to the failing plan led system?

I must immediately confirm that I am disappointed that the consideration was not undertaken rather than necessarily recommending against the plan led system. However, the argument that the plan led system, since 1991, has systemically built-in housing undersupply is one that needs rigorous testing in my view. Certainly the raw statistics give it credence and LPEG was a great lost opportunity. I suggested it to them but it was made clear that was not in the brief.

Unfortunately I have neither the brainpower nor the time to answer the question but was rather hoping LPEG would do it. But what is clear is that if ever there was a space for radical thinking, really focussed on addressing the housing problems faced by thousands of middle/lower income families then this is it. The NLP report last week highlighting the frankly ridiculous length of time it takes to get large sites allocated only reinforces this view as does the recent decision by South Staffs to delay their local plan because of upcoming national policy changes.

In the meantime let’s hope we see LPEG taken up by the Government because, within a mind-set of retaining the plan led system at all costs, it’s a great piece of work. (IMHO)


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The dangers of optimism bias

Particularly glad to start this week. Why – because last week was a difficult one which brought home the possibility of optimism bias in the land market potentially causing Barratt’s housing delivery to stall.

The previous week I had blogged about the need for realism in the land market given the economic uncertainties over Brexit and the possibility of a market slowdown in the next 5-10 years given the current stage of the market cycle. The blog stressed that Barratt is committed to growing our volume and we want to buy more residential land. We bought more land than anyone else last year and aim to do the same this. We need more land in order to support our growth aspirations.

Just to prove I am not myopic to Barratt I then read a positive city analyst’s report (on one of our key competitors) stating that the said competitor ‘continues to be disciplined in the land market and sensibly cautious given the macro risks’.

And last week’s very positive trading statement from Persimmon nevertheless refers to, ‘uncertainty surrounding the potential impact of the EU referendum result on the UK economy may continue for some time’.

Yet last week we bid for a huge site, where we will be trading right through a possible down turn and beyond the end of Help to Buy. We considered our bid to be sensible and realistic but we were then accused by the land promoter of having submitted an “insult” rather than a bid. All very frustrating and pointless given that we don’t get upset if the site is sold to a higher, more cavalier bidder. That’s how competitive bidding works.

There seemed no recognition that high land prices in the 2004-2007 period caused significant problems to all those trying to sell homes in the 2008-2011 period following the credit crunch. We are simply not going to repeat that on very large sites today. There also seemed little recognition that the bid, of many millions of pounds, was for a site worth c£10k/acre as agricultural fields prior to the recent planning consent.

Nobody on the Barratt bid team is prepared to leave our successors with a huge financial mess for them to sort out later. We all know that Barratt, even today, is trading at a loss on some sites due to cavalier bidding in the pre-recession period.

On reflection last week was perhaps about people getting angry because a post-referendum land bid on a very large site wasn’t as high as might have been anticipated pre-referendum. Maybe that is an understandable human response and maybe everyone needs to be sharing data and information better.  Something for Barratt to consider going forward – avoiding nasty surprises is always best.

The vast majority of our land promoter and landowner partners are a pleasure to deal with and recognise that if we are to build the additional homes that the nation needs there always needs to be sufficient commercial incentive for a “willing landowner and a willing developer” – to quote NPPG. Indeed the attached testimonial sheet provides evidence of that.

Barratt is doing its bit to increase volume, however we will never prejudice our future in the chase for more numbers. For very large sites now isn’t the time for landowners and land promoters to be wearing ‘boom goggles’. All that glitters is not gold and actual delivery of homes is what matters.  We are committed to doing that.

land-brochure-testimonials-final


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BREXIT JITTERS??

If there is one thing for sure with Brexit – it’s way too early to predict its longer-term impact with any certainty.

So every article and TV programme confirming precisely what will happen to house prices and housing delivery over the next two or three years must be viewed with a significant pinch of salt.

Why such lack of clarity? Because a house purchase is the biggest investment anyone can make and nobody will make it unless they are feeling confident and secure. It’s about customer sentiment – something which will vary from region to region, from town to town and from family to family. For most people (especially the 52%) sentiment is currently good, as reflected in housebuilder trading.

At Barratt we believe the market fundamentals are strong and we want to increase our housing output. There is much positive news recently. Indeed our own measurements of (a) footfall into showhomes, (b) plot reservations and (c) completed sales are positive compared to last year.

So what are we doing? In simple terms its “business as usual”. We remain committed to or strategy of controlled volume growth which has seen us increase output by over 50% in the last five years and by over 15% in the last two. Over the next few years we will work harder than ever to maximise sales rates and delivery on the sites we have. Customer sentiment is strong  and we have a good supply of consents to draw down as quickly as we can.

In terms of land and planning we spent over £1bn last year. Our aim is to buy at least as much land this year and next. After all land is our lifeblood and if we wish to grow we need more of our raw material. But we won’t simply ignore the cautious economic forecasts for the post-Brexit period. We will continue to be disciplined as we know from previous experience in 2008 that shareholders will have no sympathy if we have to try and justify over-paying for sites which require us to sell homes through the economic cycle.

So when you read about ‘housebuilder jitters’ remember that Barratt is committed to growing volume and our discipline will remain. We will continue to buy land, build homes and sell them to support our strategy of controlled growth.  We will need landowners and planners to be similarly positive and proactive.


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EVER SEEN A HOUSE GET ON A TRAIN?

Or go to the Doctors? Or drive down a congested road? Me neither.

But returning from the party conferences over the last two weeks I was left with a sense that many people seem to think that new homes, in themselves, create infrastructure demands rather than the population growth they are there to serve.

Those of us who work in housing delivery know that housebuilders are only allowed to build an amount of houses equating to the projected local population growth which will be happening anyway. We pray to the God of OAN.

Building homes doesn’t create population growth but in a civilised society new homes are needed to accommodate said projected population growth. It is the population growth which creates the infrastructure pressures not the act of laying some mortar on top of a brick.

When children ask, “Mummy how are babies made?” no parent has ever answered, “well darling, firstly someone builds a house”.

Moving on from the slight facetiousness three important points are raised.

  1. Clearly new housing can influence patterns of migration and, whilst the vast majority of our customers come from within 5 miles of the site, Barratt recognises the need to better align new infrastructure provision and new homes provision.
  2. CIL is the current approach to linking infrastructure investment to housing investment. It is a gigantic mess. There is a review underway. Will it ever be published? Will it ever be acted upon? It is certainly needed.
  3. We housebuilders need to raise our game on this point. Doctors’ surgeries, train carriageways and local roads are going to get busier due to population growth which is going to happen anyhow. Building new homes is often the only way to secure improved or new infrastructure and facilities.

New homes should be regarded as the potential solution to local infrastructure issues, and definitely not the cause.  Yet this week has reminded me we are not getting this message across.

Mea culpa and note to self.

 

 

 

 

 

 


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DELIVERY GAP AGAIN

Once again we have more media articles this week which target housebuilders and developers for landbanking consents and once again, from a Barratt perspective, it is a picture I simply don’t recognise.

This time the criticisms seem to be in two parts. Firstly that we don’t build out the consents that we secure fast enough and secondly that we don’t build faster than we can sell.

Consents

So what does the Barratt data tell us? In FY15 we secured planning consent for 17,092 units. This compares with completion figures of 16,447 in FY15 and 17,319 in FY16. I haven’t the greatest eyesight in the world but I simply don’t see any evidence of landbanking there. If there was we would be taking action because, as a return-on-capital business, we need to start building and selling on all of our consented sites as quick as possible. Indeed we are quite proud of the fact that despite significant labour market shortages and difficulties in securing some key materials, we are maintaining our actual output broadly in line with our planning approval and budget projections.

Build and sales rates

And building faster than we can sell? Not really sure how we could do this given the scale of costs and risks in selling houses. Our aim is to have the fastest sales rate as possible but our business model does not allow us to build more homes than local customers to sell to. Selling prices are set by our main competitor (the second-hand market) which, given the residual land value model, determines the price we pay for land. Whilst in theory we could cut selling prices to accommodate a faster build but that would simply mean an unprofitable development – a highly unattractive prospect for our shareholders and the loss of capital to invest in other sites. Of course the real issue and opportunity is to broaden the supply base of those building new homes as covered in a previous blog HERE. Barratt, as a volume housebuilder has done its bit with a 53% increase in volume over the last 5 years but we need help.

Solutions

Other providers, large and small, public and private, also need to step up. In my view the sites which allow those with patient capital to provide serviced sites in good locations to housebuilders are a great opportunity. Our JVs with Places for People in MK and with Newcastle City Council in Scotswood are great examples. Again I would stress that housebuilders tend to be return on capital businesses without the benefit of such patient capital. We sell what we build so have nothing to lend against.

Draft Local Plans

And my final point – what about local plans delays? Barratt alone currently has 20,000 units allocated in draft plans awaiting adoption. These are sites where we are desperate to submit a planning application and start building. However we can’t because they are currently locked up awaiting adoption of the local plan. Many (by no means all) of these plans are severely delayed. Therefore sites long accepted as being developable are being held up year after year. To us, that perhaps ought to be regarded as landbanking…….


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Bungalows

Lots of comment recently about the need for bungalows and how naughty and greedy housebuilders are by not providing them. So what’s the position from our perspective?

Land

As is often the case is comes down to land and policy. Land is our key raw material and we have to compete extremely hard for it. And as we all know consented housing land is a scarce resource, albeit slightly less so thanks to NPPF.

Barratt wins the competition for land when the land value we bid (forecast site sales revenue minus the costs) is higher than the competition. Unfortunately bungalows tend to take up broadly the same land area and cost as a house but generate far less revenue due to the reduced floorspace and rooms per plot.

As result if we have 10 bungalows on part of a site where our competitors have 10 houses we have broadly similar costs but dramatically less floorspace and forecast revenues. Result = we generate a lower land value and the landowner does not sell to us the site. So no bungalows.

Policy

Easy answer though.

If the LA produces the following:

  • demonstrable local need for bungalows,
  • reflected in the SHMA,
  • set down in policy, following public examination of need and viability
  • backed up by a site development brief requiring 10 bungalows.

Then competing housebuilders will work up land bids which reflects the need for 10 bungalows. Whoever wins, the 10 bungalows get built.

This is not one of the things that keep housebuilders awake at night. If we are required to sell bungalows by policy we will buy land on that basis and build them. They generally tend to sell OK when we have to provide them by policy – the issue is simply that they don’t generate a strong enough land value when bidding for a site where there is no policy requirement in place.

Demand

One myth that needs busting is that the ageing population means there is a huge unfulfilled demand for bungalows and that affluent downsizers will not leave the family home unless they can get one.

The reality is that some want a bungalow but many others prefer a good spec apartment in a great location. Higher ceilings, bigger rooms, high quality taps and kitchen units, independent shops and cafes nearby. Maybe a Waitrose. We are developing products for this market and the initial signs are, that in the right locations, they can work both in terms of generating a land value to win the site and then also delivering a decent sales rate.

Maybe planners and landowners can help us address these customer demands??

 


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HOUSEBUILDER OLIGARCHS

One of the commonly cited reasons for new home delivery undershooting the level of need is the underperformance of the larger housebuilders. This is simply not the case. In Barratt our output in FY16 was 17,319, up 53% on just 4 years ago. We are doing our bit. Not just increasing volume but broadening the house types and locations. More smaller products for first time buyers and more towns where we haven’t built for a while.  Our S106 Agreements deliver more affordable homes than any other organisation in the UK.

The real problems are the limited number of organisations who actually build new homes and the limited number of extra sales outlets.

Regional Builders

So how can we broaden the supply base with more smaller builders and more output from housing associations? And what has been going wrong?

There is no doubt there are more regional builders out there looking for sites. Typically they are often relatively new companies, with say 10 – 20 staff.  They have secured development funding and are looking for sites of say 20 – 80 units. Generally looking for consented sites but, as they grow then looking for subject-to-planning deals with landowners. With more support from Government (expected in the Autumn Statement) it seems clear we will see more new regional firms and existing ones growing.

Small Builders

For the much smaller builders (firms of c3-10 people, plus a local supply chain of tradesmen) there is perhaps less optimism in terms of major inroads into the build-for-sale market. They currently tend to focus on focus on residential/commercial extensions or one-off ‘grand designs’ commissions from clients who have secured their own consents. There is usually not enough profit to offset the risks associated with buying sites, securing consent and selling homes, even if development funding could be secured.

The problem is a lack of supply of consented sites to these smaller builders.

There are no land promoters out there securing consents and selling them on to the small builders. How could there be? For two houses at £250k (above the UK average selling price) the consented land value may be c£200k. If a promoter gets a 20% that means £40k. Completely unviable given the costs and complexity of the UK land market and planning process.

So what if the small builder tried to secure the land then get the planning consent themself. Well again for 2 plots at £500k GDV, the maths might work out at c£200k for the build, £100k for the land and the unconsented planning costs at £50k leaving a profit of £150k. That sounds feasible until you consider the builder needs to carry planning risks and delay, staff costs during the whole process, interest charges on finance and, above all, the sales risks and costs. Whilst you can play around with the maths (and every deal is different) the reality is that small speculative housebuilding projects are highly risky.

The small builders will continue to act as contractors for ‘grand designs’ or part of the supply chain to regional builders. Both these sectors should increase their volume of the coming years but if the additionality is above 20,000 per year we will be doing really well.

Councils and Housing Associations

Others will comment better on the potential for LAs to get back in the game of building social housing. Two things are clear, lending conditions look better than they have done in a generation and trends point to increased demand for a decent rented product.

For housing associations it will all be about land supply and risk appetite. Securing land is competitive, risky and expensive. The potential to over-pay causing really painful future losses is massive. However, housing associations can bring huge commercial strengths to the process of volume delivery of both rented and for-sale products. In particular, a longer term funding model and very cheap lending secured against good assets.

These commercial attributes offer significant potential for major volume increases from the housing association sector. If there is willingness and trust on both sides, there is perhaps even greater potential for volume uplift through housing associations linking these attributes to the land, planning, sales and marketing skills within volume housebuilders.

Already, exciting innovative JVs are in play for example our JV with Places for People (PFP) at Brooklands in Milton Keynes. Delivering new homes at pace. PFP put in the land and infrastructure then we put in the build and sale. Simple profit share.

Maybe we will see more.