Philip Barnes – Blog


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HOUSING AND INFRASTRUCTURE

Really enjoyed the Infrastructure Panel discussion at the UK Housing Delivery Summit event recently. At the table were Network Rail, Urban and Civic, Crossrail2, and Arup.

Several things particularly stood out.

Firstly it was tremendous to hear major two major infrastructure providers (David Biggs and  Michele Dix) talking about the crucial importance of aligning major infrastructure spend with the planning of major housing land releases. Would never have happened 20 years ago.

The benefits of new housing/infrastructure alignment has clearly spread from town planners to infrastructure providers. And the discussion about the financing of the new Elizabeth Line (Crossrail1) proved there are new and creative ways of creating a financial linkage between housing and infrastructure delivery if everyone thinks positively and creatively.

Urban and Civic (U&C) are perhaps the UKs leading provider of serviced housing sites. They specialise in strtaegic housing projects with Alconbury Weald and Rugby to name but two. On infrastructure James Scott from U&C made an important point about carts and horses. Reminding us that when it comes to building much needed new homes the certainty of infrastructure provision is perhaps more important than the precise delivery at a particular point in time.

As a planner it was frustrating to hear about the early resistance U&C faced at Alconbury Weald in relation to the timing of new housing delivery, despite the absolute financial certainty of early infrastructure provision. A visit now perhaps gives a sense of wishing it could have been delivered even earlier and now be even more advanced. Quality.

The discussion on Water Companies was fascinating, in particular the increasing delays and difficulties faced by LA planners and housebuilders in securing the necessary feedback from Water Companies to enable development to start.  The roles and responsibilities in this regard were a major source of debate at the recent Parliamentary Committee on Flood Prevention and no doubt we will hear more from the Government on this subject over the coming months and years. From a Barratt perspective it is clear that many Water Companies have much surplus land and given our growth ambitions are keen to engage with them and local councils on creative models of delivery which could unlock such land for housing.

Finally the discussion turned to land around stations and Arup put forward the idea of Station Development Zones around existing or proposed rail stations whereby:

  • in urban areas planning and CPO rules would be geared towards delivery higher density housing, and,
  • in suburban/rural areas the designation of a SDZ could be a material planning consideration (confirming the sustainability benefits of new housing close to rail stations) to be balanced against the development restraint policies which tend to apply to land around underused suburban rail stations

As a housebuilder who often gets told that the idea of new homes next to underused stations is ‘unsustainable’ or in conflict with Green Belt policy this certainly strikes me as great idea. If the original purpose of the station was to transport people into the City by rail, then some new housing alongside sounds like a good idea.

 

 

 

 

 


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DENSITY AND VOLUME

Over the last couple of years Barratt has focussed on building more homes from our existing land pipeline. Increased site efficiency through improving density and coverage has been the key vehicle and so far the results have been encouraging. In FY16 we managed to secure several hundred extra units from our larger existing sites simply by reworking the layout whilst we are building out the early phase. Thus avoiding any cost prohibitive delays to the build programme.

So why the current focus on more 2 and 3 bed homes at the expense of larger units?

Three key reasons:

Firstly two key shifts in the mortgage market have played into the delivery of more smaller units. Namely the easing of restrictions on new-build flats outside London and some new attractive long term fixed rate loan products. These changes, alongside Help to Buy, have much helped younger and lower income customers to enter the market. Indeed the recent 2016Q3 analysis by Nationwide made the point that (apart from in London and the SE) smaller new build homes are now more affordable than in 2006. We want to get a share of that market. If Starter Homes mean that new owner occupied homes are brought onto the market at 20% discount the position for purchasers of smaller homes could ease further.

Secondly it is obviously more commercially attractive to secure additional sales and revenue by driving extra floor space and units from an existing site than from a brand new one. Thus avoiding the extra land spend, planning and site set-up costs.

And finally both the market and Government are pushing us to build faster and at higher density. In May this year HBF Members (including Barratt) signed a formal agreement with the Government to speed up build on all larger sites. Looking solely at our larger sites above 350 units we are now forecasting an extra 500 units from this source in FY17. With similar increases for FY18.

A simple example is Watling Street in Milton Keynes. We deployed extra build and sales resources, dual-branded the development, increased density and brought forward a later phase with LA agreement. As a result sales targets have increased by over 30%. Additional revenue, faster revenue, and more homes from the same land.

Recent design changes to our range will further help us to increase our average density. For example we have introduced brand new smaller David Wilson products which will drive coverage and sales rates on those sites. Whilst the new Barratt low-rise flats will prove highly attractive to both FTBs and the increasing +55 downsizer market.

So we are doing our bit to accelerate delivery. But we face often face barriers and delays to increasing site yield if we need to secure a new planning permission. Such risks generally dissuade us from maximising site efficiency and therefore changes to planning policy to make it far easier to increase site yield after outline consent would make a huge difference. Its a very simple change – simply re-introduce the 2010 DCLG guidance on Greater Flexibility for Planning Permissions. This was also recommended in a previous blogpost CLICK HERE which, encouragingly, was endorsed by leading panning solicitors and barristers (Simon Rickets, Killian Garvey) as being a meaningful and feasible change.

With such a policy change in place we would take more steps to deliver greater number of additional homes from our existing land pipeline, capitalising on the current tailwinds from customers and their lenders.

Here’s hoping.


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SIMPLE WAY OF INCREASING HOUSING DELIVERY

We used to read about the housing shortage every week. Then every day, and now every hour. But most policymakers and commentators seem to have a blind spot to the very easiest way of getting more homes built, very quickly.

Namely to build more units per site by allowing housebuilders to increase the yield in outline consents secured by landowners, where it is clear there will be no additional harms.

It’s definitely my No.1 ask of Government.

Often Barratt is invited to bid for a site with outline permission but the consented form of development isn’t exactly what we want to build and sell. The density (mix as we call it) is too low and perhaps too focused on upmarket 4/5 bed detached homes in order to address superseded mortgage market perceptions.

Barratt wants to build more. This means both securing more land and building more units on the land we control.The reasons are simple. We are feeling Government pressure and seeing market opportunity to accelerate and increase output from the sites we invest in.  We want more homes for mid/low income first time buyers and second steppers – our traditional Barratt customers. Such homes often sell quicker so, counter-intuitively, a 2/3/4 bed mix for 120 units maybe quicker to build and sell than a 4/5 bed mix for 100 units.

But we generally don’t try to increase the site yield as the risks are too high. Firstly the risks of not winning the site and secondly the planning risks and delays.

So what is actually happening and what should be done to get more houses from less land, as we would like.

What’s Happening

The key issue is the outline consent. Most large site outline consents are not secured by housebuilders.

Often the applicants’ perceptions (or even the guidance from the council officers and politicians) is to keep the numbers down. Perhaps 90 units sounds less scary than 120 units. Perhaps nice 4/5 bed detached homes sound less scary than 2/3 bed apartments and small houses. Especially in suburban locations.

But it’s often not what we want to build and the gross effect is thousands of units not getting built because the outline consent is not right for the market. To give a feel for the scale of the issue I recently looked at 36 Barratt land bids where, in the last 12 months, we had bid for the site in accordance with the outline consent, and failed to win. For these sample sites our preferred mix (density) would have yielded a further 1,500 homes. Big stuff. One builder, 12 months. And not a comprehensive survey.

If we win the site we clearly we have the theoretical opportunity to increase the density by submitting a new planning application. This isn’t actually available to us for two reasons.

Firstly in most cases the landowner, having secured the outline consent wants their money quickly. Unsurprising after having done the hard risky work. Doesn’t want unnecessary delays or additional planning risks – simply wants a risk free guaranteed sum.

Secondly increasing the density is not risk free – indeed it is a long process with significant planning risk. Without getting too geeky we have three options:

  1. If the site density is not controlled by a condition we can apply, via Reserved Matters for a higher density scheme. Case law establishes that such an approach is perfectly legal providing the scheme does not bring additional harms impacts which not been appraised. However most LAs, particularly if the density is indicated in the Description of Development, are not keen to agree such an increase via Reserved Matters.
  2. If the density is controlled via condition but its it’s only a handful of extra units (say increasing density from 150 units to 154) then we can try for a Non-Material Amendment (NMA) via S96A. No new application but inevitable questions and concerns from the Council about whether the increase is actually non-material in planning terms.
  3. If it’s for a more significant number (say increasing density from 150 units to 180) we can try for a Minor Material Amendment (MMA). This requires a formal application under Section 73 thus creating a whole new planning consent with all the consequent risks and delays. It requires the applicant to demonstrate no additional harms and that the development is essentially the same as that granted. Unfortunately the NMA provision is rarely used as many  LAs have little willingness to grant NMAs for increased site yield.

In summary:

  •  When bidding for land to a deadline set by a landowner, rightly keen for prompt receipt of his/her hard earned money, it is usually inconceivable that we will have the opportunity to take on the risks or delays of a NMA or MMA application.
  • If we have won the land bid,and spent the money to purchase the site, our fast-asset-turn business model means we are then wholly focussed on getting on site fast and securing a return on the capital expended as quickly as possible. Planning risks and delays are not on the menu at that stage.

So What Needs to Happen?

Very simple – just go back to 2010 and re-heat the Greater Flexibility for Planning Permissions guidance specifically brought in during the recession to enable stalled sites to get going with different mixes than approved at outline. (It’s ironic that the need then was to remix apartment-led sites to deliver more houses given the collapse in mortgage availability whereas today the need is to get more smaller units built given H2B, the return of mortgage availability and the chronic shortage of homes for FTBs and low/mid income households)

The Government needs to put the old guidance back into NPPG with a bit of a fanfare. Perhaps a Written Ministerial Statement. There is already some guidance in NPPG but currently it lacks the precision or weight to encourage housebuilders to increase housing delivery via S96A or Section 73. Politically it must be far easier for Government to encourage LAs to allow 30 extra units on an existing site than encourage them to grant consent for a brand new new site of 30 units.

In my view it should be made crystal clear to LAs that they MUST quickly support Reserved Matters applications or new outline consents, which propose to increase site yield, UNLESS they can prove new and unforeseen harms which outweigh the benefits of accelerated delivery. That must be the test NOT whether the scheme is slightly different than that approved at the outline stage.

Simple change, but a major increase in the type of homes the nation drastically needs.


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TRANSACTIONS VS PRICES VS BUILD RATES

Savills recently produced their annual housing market report and forecasts. Like all Savills stuff it contained both really useful data and food for thought. LINK HERE . Whilst the pessimistic London price forecasts dominated the subsequent media headlines the transactions data is actually more eye-catching.

Prices

Many commentators would perhaps expect Barratt to be disappointed at forecasts of stable rather than sharply rising house prices. Actually it’s not that simple. Whilst we are confident about the future market (given continuing low interest rates and continuing undersupply forecasts) two factors continue to exercise our minds – namely affordability and the cyclicality of the market.

In respect of the former we have a strategy. Controlled volume growth and an increased focus on getting back to the core Barratt customer of low/middle income first time buyers and second steppers should help us address affordability issues and grow volume. Stable house prices, stable employment, rising wages, H2B and further increases in the supply of consented land will also assist.

Market cyclicality is more complex. History tells us that the more rapid the price rises the quicker the bubble bursts and the sharper the fall. 2008 was catastrophic for housebuilders. Stable house prices, if they can be guaranteed, is definitely less of a concern than the tendency to be hit first and hardest after a boom.

Transactions

The Savills transactions forecasts are definitely the food for thought. In particular the unarguable historical correlation between new build rates and wider market transactions. It’s obvious when you think about it – for a large proportion of our customers, the new purchase is linked to another market transaction. Therefore it’s sobering to read the Savills data saying that transaction numbers:

  • Have fallen from 440,000 in Q1 2006, to 394,000 in Q1 2016 and 286,000 in Q3 2016.
  • Will fall further in 2018, including a 15% drop in FTBs and 10% drop in second steppers.

Like other housebuilders Barratt won’t be overreacting given that the second hand market is our biggest competitor and therefore less transactions means less competition, especially for first time buyers. But looking broader and longer the potential threat to volume increases caused by falling transactions is not something the Government can ignore.

Help to Buy has been effective in stimulating FTB transactions for new homes, indeed the best comment heard on H2B recently was from Nathalie Elphicke CX of the Housing and Finance Institute. Nathalie asked what would have actually happened to transactions and build rates had we NOT had H2B?

But away from FTBs the projected downshift in second stepper and downsizer transactions requires analysis and attention. Perhaps Government land could play a role? A joint public/private push is certainly needed.

The starting point should be a better understanding of the causes of low transactions. This would help develop policy responses. Commonly heard reasons include the increasing costs of a transaction, higher regulatory credit requirements for mortgages (MMR) and less distressed sellers. But good solid research evidence is hard to come by. Without that it is hard to develop effective policy responses.

Barratt is doing its bit. We have developed a downsizer range and looking hard for opportunities to build it. Similarly we know that with better mortgage availability we need to increase the pace of getting back to the below-prime locations where recent undersupply, low interest rates, and H2B can help release pent-up demand from our traditional customers.

But there is also a role for Government. H2B is working for FTBs and maybe Starter Homes will help further. But we need new smart policies which will really encourage young families to trade up and older householders to downsize. A big turn of the transactions dial will make it far easier to get those extra new homes built.

The subsequent Savills report on land prices report provided good cheer for housebuilders – greenfield housing land prices down 0.3% in Q3 2016!!


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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. We need to incentivise landowners to sell to us.

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. We know we need to provide a best-in-class price and service to landowners if they are going to want to do business with us.

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. We are committed to ensuring that all our landowners have both the right price and the confidence we will deliver. Indeed the attached testimonial sheet provides evidence of that.

Barratt is doing its bit to increase volume, however we can’t prejudice our financial future in the chase for more numbers. All that glitters is not gold and actual delivery of homes driven by landowners and housebuilders working well together is what is required.

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.