Philip Barnes – Blog


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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.

 


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IS IT TIME TO REVIEW THE BROWNFIELD DEFINITION?

Everyone agrees we need to increase housing output on brownfield sites.  However the definition of previously developed land (PDL) aimed at achieving this has been largely unchanged since the first consultation draft on PPG3 back in the late 90s. The only substantive amendment has been to weaken the policy as it relates to large gardens in order to avoid garden grabbing.

The time has perhaps now come to amend the current definition of PDL in order to drive more output from brownfield sources. With 20 years of policy encouraging brownfield sites the ‘easier’ sites have gone. In many areas only the unviable, multi-ownership, technically complex sites in the weaker market locations are left. Housing under supply has grown and its disastrous consequences means that we should now explore new sources of brownfield supply.

The first port of call should be those sites which the public view as brownfield but policy does not. Namely the vacant or underused garden centres, glasshouses and golf courses which are clearly capable of accommodating new homes. With homelessness rising and  a million too few new homes since 2000 the planning system no longer has the luxury of regarding such sites as greenfield and unsuitable for redevelopment.

For garden centres the economic and planning opportunity is obvious. As the large DIY stores and supermarkets have entered the market for plants and garden equipment the country has been left with countless vacant or financially unsustainable garden centres and nurseries. Most look the same – large ugly aging structures accommodating a mix of growing and retail operations. And mostly located close to our urban areas and making no contribution to the openness of the Green Belt.

But unfortunately garden centres are classified as a horticultural operation and therefore as greenfield. Whilst case-law has established that those which are predominantly retail operations (with ancillary growing) can be regarded as brownfield the simple reality is that the planning position is at best complex and acts as a disincentive for developers. Indeed some local plans actually seek to protect such uses from redevelopment in some forlorn hope that such an allocation will somehow stem the economic tide.

If the NPPG brownfield land definition could be brought updated to make clear that such uses can be regarded as brownfield this would open up the prospect of a range of ugly densely developed sites coming forward for much-needed well designed homes and open spaces.

Similarly global warming and reduced shipping costs has dramatically affected the UK glasshouse industry. Many are now vacant or financially unsustainable. Whilst some are in remote locations unsuitable for new homes, many are located close to urban areas and offering opportunities for environmental enhancement through redevelopment.

Another sector suffering from structural economic decline is golf. As evidenced by a 20% decline in golf club membership between 2004-13 in England.

Again most are located close to our urban areas where the housing needs are greatest. They are usually ecological deserts with little or no public access. Many are slowly dying due to lack of investment and falling membership rolls. Perhaps the planning system should be working positively with Sport England and the golf industry bodies to define policies which ensure a positive future for redundant or unviable golf courses. Perhaps new country parks, new facilities for other sports, or garden villages. Or all three.

If the local planners and the golf course owners feel the course could have a viable future with new investment then maybe a small housing development on the brownfield part of the course could help provide that investment. We planners need to be proactive and positive in addressing the needs of the next generation of golfers and homeowners and renters.

Three huge potential sources of future housing supply. All housebuilders need is some positive, consistent national and local planning policy. If we get that we will aim to do the rest.


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THANKS MIPIM – YOU SOLVED MY LAND BANKING CONUNDRUM

MIPIM is always a brilliant opportunity to take in hundreds of different views on a vast array of different subjects. This “opinion hoovering” enabled me to finally clarify in my own mind what is going on with land banking. It has long been a cause of curiosity because I know that Barratt do not land bank but there is clearly an issue with some consented housing sites not coming forward fast enough.

So what were the “eureka” realisations?

1. Firstly that land banking means different things to different people. For example a local authority member at MIPIM cited an example of land banking to me. When we delved into the detail it was a site where outline consent was granted a year ago and “nothing has happened”. The reality was that:

  • the outline permission was secured by a land promoter
  • after outline consent the site was marketed and sold to a builder
  • reserved matters consent is still to be granted
  • in fact, it may well be another 6-12 months before development commences – with everyone working as fast as they can to bring the site forward.

That isn’t land banking in my book

2. Secondly, another local authority member felt that if builders are not building out a site as fast as technically possible – that is also land banking.   The reality is that housebuilders, as return-on-capital businesses are not able to build our products at a pace faster than our customers will purchase them, at the market value. We could in theory cut prices to speed up sales but as we have based our land purchase price on the estimated market values so we don’t have this option in practice. Similarly if we put lower sales values into our development appraisals when buying land we would simply be uncompetitive in the land market – our raw material.

In simple terms we build as fast as we can given the market in front of us and in recent years our sales rate has significantly increased. Across the Group we are now selling at 0.66 sales per week per site on average and faster in the stronger market areas.

3. It seems clear to me that housebuilders, LAs and others have different views on what land banking actually is. To me it’s people getting a planning consent and then deliberately either:

a) building out a site at a deliberately slow rate in the hope that rising house prices will increase site revenue, or,
b) delaying the start of a development in the hope that land values and/or house prices rise

4. In relation to (a) I have already explained that Barratt is a return on capital business and we build and sell as fast as we can. Indeed we are currently working with the Government and others on how we can further speed up build and sale without losing competitive advantage

5. In relation to (b) the eureka moment was a discussion with a planning consultant specialising in London. He revealed that:

  • approximately 80% of current workload is housing
  • it splits c80-20 with c80% for landowners/investors and c20% for housing developers
  • for the 20% of work done for housebuilders, the project always proceeds to a site start when consent is granted
  • for the 80% of work done for others the site does not then proceed to a site start in c50% of cases

Clearly a sample size of precisely one but it perhaps does show that there could be a geographical dimension to the “land banking” issue. Namely far more landowners, investors and speculators in the London land market some of whom appear to be using the planning consent for valuation purposes rather than construction purposes.

So my MIPIM 2016 sum up:

  1. Hopefully a few more people realised that Barratt does not land bank, BUT this relies on our definition of land banking as described in (3) above
  2. In terms of “our” definition of land banking there does appear to be an issue in London
  3. For those who think an unbuilt site which secured outline consent 12 months ago is “land banked” then all we can do is respectfully disagree. And the same for those who think land banking is building at a pace unrelated to customer demand

Final point would be my continuing frustrations as to how many people who cite the 475,000 unstarted consents figure without realising that:

  • many of these consented units are on sites where there remains a requirement to discharge pre-commencement conditions so actually can’t be started yet, and,
  • for a site which has started but has say 500 units left to build those 500 units form part of the larger (unstarted) figure.


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TEESSIDE USA

Reading about the recent Stoke diaspora meetings attended by luminaries such as Tristram Hunt, Kate Barker and EY Chief Economist Mark Gregory set off some questions about my own home town of Middlesbrough.

  1. Should there be a Middlesbrough diaspora trying to help?
  2. Is there one already?
  3. Could it work as there isn’t anyone named Tristram from Middlesbrough?
  4. What would we talk about?

Going straight to the last one I guess we would reflect on the fact that Middlesbrough is the only North American city in the UK.  A genuine pioneer town created within 50 years after some clever ambitious people realised that with the invention of the railways and the Bessemer process it was pretty handy having iron ore reserves within easy access of a river. From a population of 40 people in 1830 Middlesbrough grew to 40,000 in 1870 and then to 90,000 in 1900.

So riverbank farms and fields quickly changed into the town described by William Gladstone as the “infant Hercules”.  It’s nickname was Ironopolis.  An industrial success story to match Mr Carnegie or Mr Ford and accompanied by unprecedented levels of migration.  Mainly families like mine from Ireland, arriving to serve the mighty steelworks and shipyards.  In 1880 there were more Irish people living in Middlesbrough than London.  Only Liverpool accommodated more.

Then more clever people realised that the salt marshes on the other side of the river meant it was a great place to make ammonia – a core component of fertiliser amongst other things.  ICI started manufacturing fertiliser at Billingham and liked the area so much they then opened a second massive chemical complex downstream at Wilton to make newly invented products like polythene, polyethylene and perspex.  The migration continued.

In 1945 Max Lock (perhaps the leading town planner of the day) produced the Middlesbrough Survey and Plan.  A grand vision of vast industrial complexes, low density private and public housing estates and miles of new distributor roads.  All were faithfully constructed exacerbating the US look and feel of the town.

But then the problems started.

Globalisation and automation led to huge job losses and meant that Middlesbrough had too many people for its economy.  The area remained economically successful exporting vast quantities of different products around the world but there weren’t enough jobs to go round.  With high unemployment the statistics give the impression of an economic backwater.

The reality is quite the reverse.  Even as ICI and British Steel gradually reversed out of Teesside global industrial conglomerates like Sabic and Huntsman have moved in.  Not to mention the opportunities created for entrepreneurs like Steve Gibson with his Bulk haul business picking up the old ICI distribution routes.  The area remains a world-class centre for the process and chemical industries.  The port is one of the best in the UK and was a key reason for attracting Hitachi to nearby Newton Aycliffe.

But the problem of too many people stubbornly remains.  And it skews the economic status and statistics for the town because without sufficient employment opportunities many in the community unfortunately fail to realise their potential.

Clever sociologists might be able to explain why so many people were prepared to migrate to Teesside when jobs were available but, generations later, their ancestors stay when the opportunities are so much diminished.  Indeed out-migration tends to be higher amongst the most qualified rather than least.  One thing is sure – a Detroit-style mass migration out of the town would inevitably leave Detroit-style issues of urban decay, abandonment and social fragmentation.  Albeit we should remember that Detroit now, at last, seems to be resurgent.

Another thing is sure – if there had been a planning system in the 1870s Teesside (and me) would not exist.  Vast areas of land were needed to build the new industries and homes. Development and growth at a rate inconceivable in the UK since 1947 and impossible since the abandonment of the New Town concept.

In today’s planning environment local plan proposals are derived from the household projections which are based on what has happened in the last five years.  In stark contrast Middlesbrough grew on the basis of new inventions, new industries, new means of transport, new ways of raising finance and a new spirit of entrepreneurialism and ambition.  Steel rails from Middlesbrough were laid across the globe.  The current approach of “rationing” growth and forbidding development outside the local plan would have killed Middlesbrough at birth.

So no easy conclusions or answers.  The home town remains a jewel in the UK’s industrial, manufacturing and exporting crown.  A long-term economic success story accommodating huge numbers of highly skilled business leaders and workers exporting to the world.  But the problem remains that it is home to more people than its modern manufacturing economy can support.  As a result too many are leading wholly unfulfilled lives due to lack of opportunity and the statistics perhaps deter talented young people from moving to (or staying in) the town. The solution to that appears far from easy.

 


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ROSY FUTURE FOR SECOND TIER CITIES?

Time to reflect on a year of cities.  I am lucky that work means regular visits to most of the UK’s great cities whilst the need to sully favour with the children shortly to leave home has meant a few overseas city breaks in 2015.

LONDON AND NEW YORK

Perhaps the overriding impression from the year is how similar London and New York now are. And how different they both are to any other city I have visited.  In both cities:

  • the current flow of global immigration is palpable.  The millions of people from hundreds of countries are more predominant than the indigenous population creating an incredible diversity and vibrancy in terms of food, shops and culture
  • such is the resident and tourist demand for food and drink there appears to be a coffee shop or some other eaterie every 50 metres. And usually the same brands in both cities
  • West End and Fifth Avenue sell the same products, to the same customers,  from the same high end stores
  • The City and Wall Street are both increasingly crammed with brand new skyscrapers of similar architectural styles
  • Master-plans for the big regeneration opportunities at Nine Elms and Hudson Yards look suspiciously similar
  • Central Park and Hyde Park both still look and feel like magnificent green lungs but both perhaps struggling to provide the tranquility they once did
  • formerly edgy districts like Harlem and Brixton both now offer multi-million dollar flats, cheek by jowl with council estates/high rise projects
  • public transport is constantly full, 7am to 10pm seems to be the rush hour

Above all else the diversity.  London no longer feels like part of England and perhaps New York never felt like being part of the US.  Both are magnets for some of the most talented and ambitious young people in the world and it shows.

But what about the differences between these two great places.  Firstly the public realm. London is consistently fantastic – outstanding design, superb materials and high quality maintenance. New York simply isn’t like that – in stark contrast to Boston by the way. In New York the general quality of floor materials, street furniture, shop front design control and public spaces is way below par in most areas. The superb public realm being laid down at the World Trade Centre is in sharp relief to many other parts of Manhattan.

Secondly the infrastructure.  I can only imagine what a regular user of Penn Station must think when entering the fantastic Kings Cross/St Pancras or perhaps viewing the transformational plans for Crossrail or Euston. And the snails pace of trains on the “high speed” 215 mile line from New York to Boston. About an hour longer than the 285 miles covered by the 7.04 from Newcastle to London. Plus, having travelled the New York subway for a week I will never again moan about the state of London tube trains again – albeit seems easier to get a seat.

Thirdly the levels of construction.  Cranes everywhere in London but surprisingly few and far between in New York.

PARIS, BOSTON AND MANCHESTER

Thirty years ago on my first trip to Paris I remember being struck by how similar it was to London.  Albeit with the distinctive Parisian style.  The scale, the variety of independent shops and businesses, the grotty streets so close to the richer ones, the mix of busy and quieter neighbourhoods and the endless symbols of imperial greatness.

Today it seems everywhere within Zones 1 and 2 in London is busy, gentrified and dominated by modern global brands.  In contrast, Paris this Autumn felt surprisingly similar to thirty years ago.  Still incredibly beautiful and well planned but lacking the full-on vibrancy and levels of investment evident in London or New York.  More like Barcelona, Boston, Manchester or Glasgow.

Major cities serving millions of people rather than billions.  All with some architectural masterpieces (both older and newer) and downtowns dripping with wealth and splendour whilst some nearby streets still seem shabby and ripe for new investment in businesses or homes. Economies where tourism and sports branding seem to be playing an increasing role in economic development.

SUM UP

So what am I saying here?  I guess that New York and London both seem pretty full.  Both appear to face increasing difficulties in providing an affordable quality of life (beyond work and cultural opportunities) for the world’s most talented young people.  Will such people make different life choices in the future?  Perhaps deciding that location isn’t as crucial as it once was for engaging with the world’s most successful economies. Could this perhaps drive an economic renaissance of these second tier cities (especially where they can fall within the economic ambit of New York and London) over the next 50 years?

Subject, of course, to essential and expensive caveats about infrastructure, culture and public realm.  And recognising that walking through Wall Street or EC1 does make you realise that many of those who simply want to be be rich and powerful will continue to be drawn there for many years to come.

However, go to Manchester and Boston right now – their talent driven renaissance appears already to be well underway.  Who else next?

Final point.  Obviously never been to any of the great cities in the Far East or Africa.  To be continued hopefully….