Philip Barnes – Blog


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WE WERE HERE FIRST

Holiday reading has revealed fascinating differences (and similarities) between UK and US nimbyism. The two sources were:

  • Research by UCLA revealing the true reasons why US nimbys dislike developers and development;
  • The superb book, ‘Snob Zones’ by New York Times journalist Lisa Prevost. It describes the uglier side of localism in some of the quaint towns of New England.

This post looks as those sources and draws conclusions on the lessons and potential implications for the UK.

Opposition to development or opposition to developers? (UCLA, Feb 2018)

In a nutshell this research concludes that the key reason local residents don’t like development is because developers make a profit. And lurking beneath it says there is also a “resentment of new people who might be a different racial or income group”.

Other key points in the report were:

  • In the US there is a long established negative cultural perception of developers as greedy or rapacious. Think; Its a Wonderful Life, or even Donald Trump. And more examples HERE ;
  • In a controlled experiment, resident opposition to a development doubled when the group were told that the developers would be making a large profit;
  • A vicious circle gets created whereby (a) development is unpopular, (b) zoning gets stricter, (c) development therefore gets riskier, (d) developers who are able to take on the risks make larger profits and (e) development becomes even more unpopular (see diagram, below);
  • The cycle is exacerbated as successful developers in strict zoning areas need deep pockets and a confrontational mindset. That mindset engenders the obvious counterpoise from residents;
  • The biggest financial beneficiaries of anti-development zoning are existing homeowners who are then able to behave as a highly effective cartel;
  • Despite the findings of the survey-framed experiment, the research found that nimbys disguise the true underlying reasons for opposition, “even from themselves”;
  • Whilst concerns over fairness may drive the anti-development mindset the researchers were not clear who actually benefits (or doesn’t benefit) from the supposed fairness created by preventing new homes.

The paper notes that, surprisingly, in a country where nearly everyone lives in a home built by a developer, the instinct in many areas is to punish the producer of that home.

Snob Zones, Lisa Prevost

This searing insight looks at a number of New England towns, and argues that, in some areas, the American dream of of “opportunity for all” appears to have been replaced by, “every town for itself”.

Prevost argues that localism is leading to shortfalls of housing, ageing towns, rising prices and hugely increased disparities and inequalities.

The book describes in captivating detail:

  • The upmarket Connecticut town where the zoning commission has ensured there isn’t a single apartment building or condominium in the town;
  • The town in Massachusetts where a small development of 4 ‘cottage apartments’, proposed in full accordance with the State policy to support lower income households, was rebuffed and rebuffed until the developer went bust;
  • The town in Maine where an affordable housing scheme by a local non-profit organisation was stalled by the zoning commission until the State funding ran out. Luckily the scheme got built and was actually accepted as successful by residents;
  • And another town in Connecticut where legal action by the State was necessary to overcome exclusionary practices by local officials.

Prevost concludes that the baby boomer generation is driving the opposition to development. Perhaps even without realising that encouraging more McMansions, whilst opposing more smaller homes, is increasingly out of step with younger aspirations. And therefore more likely to devalue their house.

Lessons for the UK

The first lesson is the pride we must take in the UK planning system. Generally transparent, accountable, rooted in a meaningful democratic process and free from malign influence. Talking to Barratt old timers, about the time when we had French, Spanish and US businesses, that is not something to take for granted.

And secondly, that however frustrating some UK nimbys are, we developers need to work harder to build trust and respect for our product.  Especially as perceptions of the sector are perhaps less negative as in the US.

Houses are becoming both scarcer and more financially important to their owners. We need to understand that and perhaps message to local residents on these concerns rather than just about the tilted balance or traffic congestion. And, however difficult, recognise that being confrontational in a confrontational process often doesn’t end well.

But if the US does precede UK trends and cultures then Snob Zones does not paint an attractive housing future. It foretells of increasing societal separation and greater polarisation between perceptions of conservation and new development. Watching UK suburban Council leaders proclaiming a need for less housing within 24 hours of new lower household projections isn’t grounds for optimism.

The possible rise of an “I was here first” mentality, focused on certain age and income groups, pulling up a ladder they were pleased to climb up themselves. Perhaps we need more granular research on the drivers and nature of localism and nimbyism in the UK.

Developers, planners, politicians, and others, with influence in addressing the housing crisis perhaps need to step up. An approach which restricts aspiration and access to capital appears only likely to store up trouble. Especially as the UK public debate appears to be moving away from the shortage of homes and more towards the profits of landowners.

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LAND VALUE CAPTURE : SELECT COMMITTEE LEAVES SOME QUESTIONS UNANSWERED

Some thoughts on the recent HCLG select committee report on land value capture (LVC).

First question is why even bother given that housebuilders prefer lower land prices and more LVC could help?

The answer is that that Barratt wants to build more homes and we see that much higher LVC could disincentivise landowners. Thereby presenting a threat to the necessary supply of land to support growth.

Good bits

The report is a credit to the committee in terms of the its depth of analysis and the balance in its presentation. The conclusions, from a practitioner’s point of view, are generally sound.

In particular, it is good to see the recognition of:

  • LAs needing to maintain up to date and deliverable local plans;
  • The scale and importance of existing LVC mechanisms, namely S106 and CIL plus the taxation of development, landowners and developers;
  • The benefits of a Local Infrastructure Tariff, perhaps as an alternative to CIL;
  • The folly in the oft-stated view that, on the continent, housing land is bought by the state at agricultural value;
  • The need for greater transparency in the viability and LVC process, something that Barratt has not resisted.

Good but familiar bits

Many of the other conclusions are equally sound but have been made by other select committee reports, so many times over my career, I am not sure they add much new. In particular the recommendations to:

  • Look more closely at the law and practice of CPO;
  • Encourage more LAs to use CPO more often;
  • Produce a new LVC mechanism which is “simple to administer without complicated exceptions” (Perhaps easier to say than do).
  • Spend more money on training planning officers;
  • increase the resources in LA planning departments.

Not so good bits.

Notwithstanding the above, there appears to be some areas, despite the depth of the analysis, where it seems that the Committee has not quite got it right. Obviously looking solely from the perspective as someone out securing sites and making planning applications.

For example, in the section on CPO I was pleased to be quoted (para 100) saying that, “many commentators simply ignore the both the Human Rights Act and the role of the plan led system”. But was then left disappointed that the Committee didn’t make any analysis of the role of the plan-led system prior to making it’s recommendations. Thus leaving unanswered, a key question namely:

  1. Should the LA buy the housing site at the end of the plan-led process, at agricultural value, in which case a two price market will be created, given that all other allocations will trade at the market value reflecting the allocation; OR,
  2. Should the LA buy the site at the start of the plan-led process, at existing use (agricultural) value. Thus creating the risk of not being allocated for housing by PINS, when compared to other sites, against the NPPF site allocation guidance. (Unless of course the process always ensures that the Councils’ site wins, North Korea style)
  3. Or somewhere in between?

More clarity is required on how the state can effectively be both (a) responsible for the fair operation of the plan-led process and also (b) a participant with risk money invested in the same process.

Secondly the Committee delved into the details of land valuation and then felt able to assume that c.50% of uplift was retained by the landowner and therefore, “our view is that there is scope…… to claim a greater proportion of land value increases……” However this conclusion proceeded a discussion on land values derived from out of date Government sources which themselves advise that they should not be used as market value estimates. And it remains unclear as to whether the fundamentally important issue of net to gross land values has actually been factored in. Neither in terms of (a) net to gross development area or (b) net to gross values, either including or not including S106 costs.

Thirdly the report references the threat of CPO as a means to drive down land values. From my seat that threat is hollow. Barratt often struggles to find LA resources to determine its planning applications on time so the idea that LAs can realistically step up to CPO’ing land for 300k homes, every year, seems fanciful. That means 000’s of sites every year. The reality is that most land will always trade on the open market, cognisant of local plan and NPPF policy.

Fourthly it is good that the Committee refers to a shift towards the victim of a CPO being, “provided with an equivalent replacement”. However that is also much easier to say than do, especially in areas of the North where the experience of the Pathfinder Projects confirms that this additional cost burden would likely result in an enormous gap between the price paid for the CPO land, and the subsequent open market value of the cleared site for new homes.  I recall once calculating the acquisition cost of a small estate of terraced homes, and then comparing it to the actual value of the cleared site.  Frightening.

And finally it was disappointing to see the Committee appearing to give credence to evidence referring to a £500 per sq ft (£5000 per sq m) CIL rate. That would simply end housing development in the UK

Sum Up

So three concluding questions from a practitioners perspective:

  1. The Committee confirmed the importance of the ‘no scheme’ world when valuing land for CPO. This is obviously straightforward when valuing a farmers field needing to be acquired for a new road junction, which opens up access to a new development area. But perhaps less easy when valuing land which, despite no current local plan allocation or consent, complies with NPPF guidance on where future housing allocations could and should be made. In that circumstance, what does ‘no scheme’ and ‘hope value’ actually mean in the real world of land valuation?
  2. With the impossibility of LAs being able to CPO the 000’s of sites for 300,000 homes per year, how can a two price market be avoided if the state wishes to CPO at land values well below the level which rational landowners will sell at?
  3. Will the more radical Select Committee recommendations actually gain any traction? Perhaps not given that Kit Malthouse was very clear in his evidence that the focus must be on letting the recent changes in the 2017 Act and NPPF bed in. Very sensible IMHO.

Final point is to agree with the lawyers. Both in the evidence to the Committee but also HERE (Simon Ricketts) and HERE (Richard Harwood QC). Namely that deliverable local local plans, with good policies focussed on creating great places, is the best way to “right price” housing land.

No thanks to further changes with potentially massive unforeseen impacts on housing delivery and yes please to up to date local plans which deliver infrastructure and great places.

 

 

 

 


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WE CAN’T BLAME LONDON FOR CUTTING NORTHERN HOUSING NUMBERS

Lots of anger coming out of the Northern planning and housing sectors in recent months, much of it directed at both the Government’s approach to transport infrastructure and the standardised assessment of housing need. (SOAN)

Living in Northumberland, but constantly travelling the UK by public transport, the louder the transport voices the better. In simple terms there surely cannot be a greater transport priority than the Trans-Pennine route at the moment.

Ref SOAN, is the anger towards Government is correctly targeted?

NPPF2 indicates that an alternative approach (ie higher numbers) can be justified if it reflects future demographic trends and market signals. Therefore if any northern LA feels it should build more homes than SOAN, in order to better align housing targets with job growth targets, then there does not appear to be any fetter on doing so.

The starting point for preparing housing growth targets in local/ regional plans, whether in the North or the South, has always been the ONS household projections. From there an uplift has often be applied to ensure alignment of the housing and economic growth targets. Who could ever forget the Silver-Bronze and Silver-Bronze 2 scenarios which underpinned the North East RSS.

So the principle of ‘over providing’ on the basis of future economic growth has always been implicit and evidence based, with ONS projections as the starting point.

Therefore whilst there is much (entirely justifiable) concern about LAs recently “cutting” their housing numbers it must be remembered that the cut is being made by the LAs not SOAN.

The LAs themselves produced the original figures, based on job growth projections, and then the LAs themselves have now cut the numbers. Despite NPPF2 indicating that the higher homes target can be justified if it reflects future demographic trends. There has been no Government influence.

Ah…….. but the obvious response is that higher numbers above SOAN require “exceptional circumstances” to be justified. Therefore when looking at the recent Government/PINS responses to the Birmingham, Durham and Bradford local plans there is clearly little incentive for any LA to push the SOAN envelope where it butts up to Green Belt policy.

Which is the point.

The greater issue for the North is the ridiculously extensive Green Belt and its ridiculously tight inner boundaries, not SOAN. The North is choked by Green Belt to an extent beyond any other region in the UK outside London. We recently mapped all the development constraints within one hour drive of all our 27 Divisions. For our Leeds Office 80% of all open land is Green Belt. The highest equivalent figures for any other office outside the 3 Northern regions (excluding London) is 20.2%.

In Manchester:

  • The Green Belt is 45% bigger in area than Greater Manchester itself;
  • If the Green Belt were a tennis court, land for 1000 homes would measure 5 inches by 5 inches and it would take 1,800 years to ‘concrete over’ the Green Belt at 1000 new homes per year in the Green Belt;
  • Between 2000 and 2010 Munich had population growth 1/3 of Manchester but expanded its urban footprint by 7 times as much.

One wonders whether the architects of these Northern Green Belts, 40/50 years ago, really intended to create a situation where housing growth, in the 2020’s, in particular for families wanting homes with gardens, remains so hugely constrained due to their efforts.

Urban and brownfield sites clearly need to be prioritised, for example by building City Centre Build to Rent skyscrapers, but one wonders whether the housing futures of Munich, Lyon, or Rotterdam, et al, are so similarly dependent on the delivery of a rented apartment housing product compared with providing the preferred tenure/type choice of the City’s residents? And all because of a “say no” Green Belt boundary rather than a ‘say yes’ growth policy.

It’s all about local politics. The admirable political grit and determination of Newcastle and Gateshead, to regularly review Green Belt, and then prepare ambitious up to date plans, now needs to reflected in the likes of Manchester, York, Bradford and Merseyside. Has Tyneside been significantly harmed by building Newcastle Great Park?

Whilst there may be little cause for confidence at the moment lets not take the normal Northern response of blaming London instead of the difficulties of local politics and questionable Green Belt boundaries.

Final point. Green Belt is the most successful ever UK planning policy, in particular relating to the spatial containment effects around London and the impetus to urban regeneration in Manchester. Green Belts as a concept and planning tool must be protected. However, the current social impacts of such tight boundaries, and huge Green Belt extent, now needs to be balanced against both qualitative and quantitative housing needs.

The release of 2/3% of the worst and most accessible bits of current Green Belt seems sensible and NPPF2 helps by making clear that Green Belt LAs cannot shirk their housing requirements. Rather they are directed to:

  • Adopt a sensible sequential approach to Green Belt releases, starting with brownfield, then public transport and also considering whether compensatory benefits can be achieved.
  • Release brownfield Green Belt sites unless substantial harm;

Although referring to London alone, Siobhain McDonagh MP argued the point superbly on BBC Breakfast when responding to the recent CPRE report claiming that Green Belts (which doubled in size over the last 20 years) are under attack. (See below from 1.48 onwards).  http://www.bbc.co.uk/iplayer/episode/b0bdfsl8

In simple terms LAs must consider the social and sustainability consequences before adopting a “hands off” approach, irrespective of the unpopularity with existing homeowners. And there is nothing in NPFF2 to prevent them.

T’was ever thus.

If LAs want to cut ambitious housing targets because proposed Green Belt releases proved to be more politically difficult than they expected, then they can. But old, bad Green Belt boundaries are the cause of that, not SOAN.


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THE WHO AND HOW OF HOUSEBUILDING – LESSONS FROM HISTORY

  1. Lyons, Redfern, Barker, Raynsford, Taylor, and now Letwin. We may have been short of new homes over the last 10 years but no shortage of reviews on how to build them.
  2. But one thing sets the Letwin Review apart from the others – the level of detailed investigation into how private housebuilders build out large sites. Digging deep into all the 17 sites under review, talking to the staff who build and sell the homes. Asking the right questions and getting the right answers
  3. So it came as no surprise that his interim review was accepted as a solid analysis. I tend with agree with both Civitas who described it as, “a strong diagnosis”, and David Montague the CEO of L&Q who said that, there was a Mexican wave across the sector that someone finally gets it”.
  4. Letwin has pointed to the need for greater diversification to achieve faster build rates on larger sites. Nobody is arguing against that. And despite the protestations in some quarters of disrupting and deconstructing the housebuilding sector there doesn’t seem to be any agency, review body or think-tank suggesting that volume housebuilders are not going to be crucial in achieving the 300,000 per year target.
  5. But even Letwin, like all the other reviews, does not appear to have studied the history of speculative housebuilding and housebuilders. Understanding the people and the businesses who built the homes and the lessons to be learned. With this in mind the post below is intended to assist the current policy debate on the structure of the sector.

1930 – 1955

  1. There is much to be learnt from the 1930’s, setting aside the obvious point that it predated the planning system. Speculative housebuilding, in the sense that the builder speculates that the land purchase and construction cost will be outweighed by future home sale revenues, began here. Prior to the 1930’s builders tended to be fixed price contractors acting for developers and landlords who were taking the land and sales risk. Land was cheap due the absence of planning and low food prices. The early pioneers included Ideal Homes, Henry Boot, Wimpey, Taylor Woodrow, Costain and Laing. Generally smaller builders, often from a contracting background, selling less than 1500 homes per year. They were all freely buying and developing large landholdings on the edge of cities, in particular London. The driver for was easy funding from building societies, who would also fund the customers mortgages. Prices were set by customer affordability and build rates were fast as the market allowed.
  2. The 1939-45 war and the 1945 election killed off speculative housebuilding until the mid 50s. During the war housebuilders turned to Government contracts, on decent margins, to help the war effort. Henry Boot, Costain, Laing and Taylor Woodrow  helped build Project Mulberry (the floating harbour for the D Day landings) whilst Wimpey, Henry Boot and other housebuilders worked flat out building airfields, military camps and barrage stations.
  3. The new Government in 1945 virtually banned speculative housebuilding by maintaining defence regulations, controlling the supply of steel and timber, requiring a licence for any private housebuilding and introducing a 100% Development Land Tax via the 1947 Planning Act. All new homes were to be Council houses. The remains of the entrepreneurial 1930’s speculative builders either took on housebuilding contracts for Councils or continued with general contracting work.

1955 -1973

  1. The 1951 Macmillan Government removed the controls and reopened market access for speculative housebuilders. Whilst the reforms took a while, by the late 1960’s the sector was spawning new names such as Barratt, Bellway, Whelmar and Broseley. Longer standing housebuilders such as Wimpey, Bovis, Leech, Bryant, Bellway, Bett and McLean grew rapidly.
  2. Learning lessons from post 1955 means looking at both the conditions which created growth and then the effects of downturns. The new planning system created opportunities for highly skilled entrepreneurs to use land buying and marketing skills to accumulate land and then secure planning consents, via by the 1947 Planning Act. Once achieved, the ‘rationing’ of these consents gave some protection against market saturation by competitors. At the same time customer demand for owner-occupation strengthened through the late 50’s to the early 70’s. Rapidly rising house prices transformed the sector from builders to marketeers – all selling the dream of home ownership, supported by positive policy.
  3. Total housing output rose significantly, from c250,000 completions in 1960 up to c350,000 in 1968. Drivers of private housing growth were economic growth, easier customer access to credit and no Green Belts (other than London). But also, and crucially:
  • High profile entrepreneurs like Godfrey Mitchell at Wimpey, Laurie Barratt, Tom Brown at Whelmar, Danny Horrocks at Broseley and Frank Sanderson at Bovis. They all took risks and they drove their businesses hard, sometimes targeting a flotation;
  • Bigger commercial contractors found the margins in housebuilding eyecatching and moved into the speculative housebuilding sector. Examples included Wates and Galliford.
  • In contrast to the 1930’s, highest growth tended to be in the North and Midlands given that the London Green Belt had diminished the ability to secure large sites on the edge of London – a deliberate policy linked to the development of public sector led new towns
  1. Speculative housebuilders grew significantly. Either organically, (Eg Wimpey) or through business acquisitions, (Eg Barratt) or by diversifying into other development activity such as commercial property and/or contracting.
  2. The oil price crash in 1973 brought the good times to an end. The subsequent downturn hollowed out the industry. Only a few survived intact including Barratt, Wimpey, Leech, Bellway and McLean, and all with dramatically reduced volumes. Many of those who had diversified into the speculative housebuilding sector from contracting either died or rapidly reversed out.

1974 – 1991

  1. Cash management was the key to surviving the 1973 crash. Those who ‘dashed for cash’ during 1971 and 1972 fared best. They had slowed landbuying land, slowed new home starts and focused on finishing and selling homes in the run up to the crash. They then nursed their war-chest and, when the market started to recover, were able to buy new land at much cheaper prices and hence started building again.
  2. Private volumes continued to decline during the mid/late 1970’s, but the 1980’s brought easier planning outside Green Belts, softer lending conditions and increasing customer confidence. Output soared as house prices rose.
  3. The good times of the 1960’s were back:
  • Contractors ploughed back in, inter alia, Costain, Laing, Lovell, Balfour Beatty, Alfred McAlpine, Mowlem and Amec;
  • Conglomerates entered and/or increased their speculative housebuilding presence including, P&O, Salveson, Trafalgar House and Beazer.
  • The speculative housebuilders grew again and diversified with even greater vigour – by opening offices in Spain, France and USA, by doing more contracting, and by developing commercial properties.
  1. And then Groundhog Day – the 1989 recession followed by Black Monday in 1991.
  2. All the contractors reversed out again, huge numbers of smaller housebuilders died, and those which were big and strong enough to survive, retrenched to core business.

1992 – 2007

  1. As with 1973, the Black Monday recession did huge damage but those able to survive came out the other side stronger by being able to buy land at recessionary prices as the recovery started. Tony Pidgeley set Berkeley up in 1976. By 1989 he was calling the downturn and started his dash for cash. The rest is both Berkeley and housebuilding folklore.
  2. So 1991 created the mindset that the only the big survive. This emphasis on size, strength and recession-resilience helped trigger a period of merger-mania. Inter alia:
  • Wimpey took over Taylor Woodrow, Alfred McAlpine and Bryant;
  • Beazer took over Leech,
  • Persimmon bought Ideal, Beazer and Westbury;
  • Barratt took over David Wilson;
  • Taylor Woodrow took over Wilcon;
  • Morgan Sindall took over Lovell.
  1. But the mergers and acquisitions raised issues. They are expensive and therefore usually reliant on credit. This creates a huge susceptibility if credit gets crunched, even more so if the customers for the new homes are also reliant on credit. And even more so again if the business has weighty land creditors due to land acquisitions made at high prices due to positive market conditions and highly restricted supply.
  2. And so it was as the sector grew significantly from the mid 1990’s up to 2007.

2008 – Today

  1. The GFC was the longest downturn of all. Whilst merger-mania had created some strong large businesses the key issue (other than no mortgages for customers) was balance sheet. Many of the mergers and land acquisitions had left large debt overhangs with limited cash coming in to repay. Therefore, in stark contrast to earlier recessions, some smaller builders, with less debt exposure were perhaps able to weather the storm slightly better. Perhaps Bellway, Redrow and Bloor as examples.
  2. But it was long cold winter for all. Many failed and without the Government support provided by Kickstart and Homebuy many more would/could have failed.
  3. The good news is that current market conditions and behaviours appear to show, hopefully, much greater resilience looking out to the medium/long term:
  •  Balance sheets are generally good and excessive lending appears curbed;
  •  Planning reforms are creating more land supply and hence moderating land prices. Hopefully this will continue via NPPF2 and ensure that land debts will not be a major problem if/when a downturn comes;
  • Mortgage market regulation has curbed reckless lending and low, or slightly rising, interest rates look the most realistic in the medium/long term;
  • UK banks are are in a resilient position and the global economic outlook is positive;
  • Optimism-biased approaches to land acquisition and future sales prices, previously often driven by high profile individuals, and often debt-backed, have moderated;
  • Homes England are well funded and playing a significant role in supporting sustainable housing delivery. This will help shape outturns across the cycle;

Conclusions and lessons

  1. So what would be they key lessons looking back at the who, and the how, of speculative housebuilding over the last 100 or so years:
  • Strong speculative housebuilders are the bedrock of housing delivery in this country and for those currently working in such businesses there appears grounds for optimism;
  • Its a tough, high-risk sector. History says that those entering from another sector often do not survive the next downturn, especially if raising debt. The profit potential is eye-catching in an upturn but the downturns tend to be deeper and harsher than other sectors;
  • For speculative housebuilders – diversification and excessive debt never appears to end well.
  • Strong recession resilience means knowing when to call the top. Thankfully this appears appear some way off hence why Barratt (and others) retain full commitment to our volume growth plans.
  1. The sector needs to be diversified to drive up delivery. Letwin confirmed that and history, particularly the 1930’s, demonstrates that. But let nobody be under any illusion that housebuilding isn’t a difficult and, at times, brutal, sector. The key lesson is perhaps that those who do it well need supporting. For those with less experience of this intoxicating cocktail of entrepreneurial land skills, building skills and selling skills, proceed with eyes wide open. Although much regulated, it is nakedly commercial and unforgiving, whilst playing a crucial role in delivering a basic human need which is in short supply. One thing is sure – got to be the most exciting sector of the economy to be working in right now.


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LETWIN AND THE REPUTATION OF HOUSEBUILDERS

Sometimes its good to be reminded just how relentless we housebuilders need to be in improving perceptions of our sector by driving positive behaviours and arguing our case.

So it was recently when I read on Twitter that:

  • Only 2 weeks after the Letwin Review confirmed that housebuilders do not landbank, Taylor Wimpey was asked about, “excessive landbanking” at a recent conference, and;
  • Parliament was told that, “the rules are exploited by big out-of-town volume housebuilders, which are clearly banking permissions”.

Given recent media coverage of various issues affecting the sector, over recent months, it’s perhaps not surprising. It is up to the sector, and nobody else, to rebuild public confidence.

Whilst Barratt has not been the focus of any of the recent coverage it has affected us and meant we have reiterated our determination to excel on our two key priorities:

  • The health and safety of those working for us;
  • The quality of product and service to our customers.

Part of the product quality agenda relates to urban design and building design. We know this is a key focus for both Homes England (HE) and MHCLG, as exemplified in the support for Building for Life 12 (BfL12) in NPPF2.

BfL12 is part and parcel of how Barratt designs homes and we hope to liaise with both HE and MHCLG in driving it out further. Well designed new homes help with both public acceptance and the reputation of housebuilders.

The Letwin Review, so far, has demonstrated a sound understanding of the sector’s approach and processes. Letwin confirms:

  • Housebuilders only secure land for one single purpose – to get on site building as quickly as we can;
  • We build and sell as fast as we can, given the level of local market demand, meaning that sites in good market locations tend to get built quicker;
  • Our selling prices are set by the local second hand market – plus a premium. If we sell lower we won’t be able to compete when trying to secure land. If we sell higher we won’t be able sell the home. Both are a non-starter;
  • When buying land we assume that selling our homes will not cause lower local second hand house prices and we do not assume rising house prices;
  • We could potentially build faster on larger sites but that could result in expending excessive amounts of capital with no guarantee of sale. Land and build are hugely capital intensive and this would clearly run counter to our commercial objectives;
  • With more sales outlets on a large site the pace of build and sale will increase, but not in direct correlation. 10 builders, building 100 units each, on one site for 1000 units, will sell more slowly that 10 separate, dispersed sites of 100 units each.

Whilst we await Letwin’s final proposals, the Interim Report is robust and positive. As David Montague, CEO of L&Q said, “there was a Mexican wave across the sector that someone finally gets it”. For a housebuilder it was good to see the Letwin narrative accepting that we are actually trying to be part of the solution to the housing crisis rather than than a problem requiring to be or broken up or reconstructed.

And there are other grounds for optimism that housebuilders can improve our reputation:

  • The sector has grown output by 55% over the last 5 years, and barring worsening supplier issues, weakening customer demand, or more ‘Beasts from the East’, it will continue on this track;
  • The Homes England investments and interventions seem sure to help support those committed to building and selling more good quality homes;
  • Many of the larger builders, Barratt included, have confirmed plans for growing volume and reaffirmed their commitment to good design;
  • Overall customer satisfaction levels are rising;
  • Health and Safety levels are rising;

One thing is for sure our reputation will not change itself. We need a united consistent approach and recent actions create hope of achieving the perception change that the sector needs right now.
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CAPTURED

Land value capture seems to have returned to prominence for those wishing to reform the planning system once again. It dominated the noise around draft NPPF2 and a Parliamentary Select Committee is currently looking at the issue in order to publish its findings……….. After NPPF2 has been finalised!

The responses to draft NPPF2 ranged from proclamations of victory to forecasts of land market collapse.

BUT WHERE DOES THE REALITY LIE?

It’s clearly impossible to tell at this stage and this post simply gives a practioner view in relation to greenfield sites currently in use as agriculture and proposed for housing development. Brownfield sites are a whole different ball game.  Barratt was invited to give evidence to the above Select Committee HERE and this post obviously draws upon that.

Hopefully starting with a few uncontroversial comments on the logic behind the proposed changes:

  1. Any change to land valuation, for planning purposes, must ultimately be defensible for compulsory purchase purposes at land tribunals;
  2. Valuing land via EUV Plus, for planning purposes, requires the state (LAs) to define the ‘Plus’ in EUV Plus;
  3. If the ‘Plus’ is set too low, it would seem likely that landowners will not sell land voluntarily;
  4. If landowners do not sell land voluntarily, then CPO will be required to ensure a supply of housing land for housebuilders to build homes;
  5. Given existing levels of skills, experience and resources, it is inconceivable that LAs, (or any other public bodies) will be able to CPO land, at below market value, from resistant landowners, for 300,000 homes per year;
  6. Under the Housing Delivery Test, if insufficient land and homes are brought forward, then the Presumption in Favour of Sustainable Development will kick-in;
  7. Landowners (and housebuilders) will bring forward land, (separate from the land to be CPO’d by the state), at market value, for the development of new homes via the presumption in favour of sustainable development;
  8. Points 4 – 7 when conflated, will create a two-price land market, namely;
  • Price A : for land to be bought by the state, via compulsory purchase at sub-market prices, and;
  • Price B : the open market value of land which will be brought forward pursuant to the Housing Delivery Test and the presumption in favour of sustainable development;
  1. A ‘two-price’ land market is one where a landowner receives a sub-market land price from the state, compared to his neighbour who has just sold at full market value.  This appears grossly unfair. (Indeed a recent presentation by Richard Harwood QC, to the Compulsory Purchase Association, indicated that this has led to the demise of similar proposals in the past);
  2. Housebuilders would have no objection to housing land being purchased by the state, at sub-market value, and then sold to us, via the open market, fully de-risked in planning and infrastructure terms.

SO WHAT DOES NEW GUIDANCE SAY?

My summary of the new draft guidance would be:

  1. The local plan affordable housing (and infrastructure) requirement, for all housing developments, will be set by the local plan. The public examination will provide the forum to determine that requirement, for different types of site, and for different spatial areas.
  2. In terms of setting the local plan target, the required evidence to (a) set land values, (b) support the affordable housing policy and then (c) ensure that ‘rational’ landowners will release their land for housing, will be based on the ‘EUV Plus’ valuation approach rather than the RICS Residual or ‘Red Book’ approach.
  3. In setting their local plan requirements, Councils will need to ensure that “policies should not make development unviable and should be supported by evidence to demonstrate this”.
  4. After the local plan policy is in place, “it is important that local authorities are sufficiently flexibleto prevent planned development being stalled in the context of significant changes in costs and values over the lifetime of the development”
  5. The EUV Plus approach requires the LA to set a land value, which will incentivise a rational landowner.  The guidance confirms that a key metric for this will be market comparables, stating that “when undertaking any viability assessment, an appropriate minimum premium to the landowner can be established by looking at data from comparable sites” and “the price paid on top of the EUV should then be used to inform a judgement on an appropriate minimum premium to the landowner”.
  6. Developer profit has been set at 20% for OMV units and 6% for social units “in circumstances where this guarantees an end sale at a known value and reduces the risk”. It is presumed that the margin for all units is 20% in the absence of these conditions.
  7. BCIS should be used to define build costs.
  8. If a viability negotiation is required to accompany a planning application, it must be based on the same land appraisal assumptions which the LA used when defining the local plan policy.
  9. In terms of defining the level of landowner receipt, LAs now need to base land values on what a ‘rational’ landowner would accept, rather than what a ‘willing’ landowner would accept – as previously. A subtle but important change that will likely occupy many hours of court time going forward.

WHY HAS THIS CHANGE COME ABOUT GIVEN THAT THE AMOUNT OF PLANNING CONSENTS, NEW HOMES AND PLANNING CONTRIBUTIONS ARE ACTUALLY INCREASING?

  1. The policy change has been driven by concerns over the circularityof the RICS Residual Method of land valuation approach, when applied to affordable housing negotiations. Namely the fact that the RICS method states that the residual land value is produced after the level of planning requirements has been set as a cost. BUT, on some planning applications, there has been a negotiation to vary the policy requirements for affordable housing, on the assumption that the land value has been set as a pre-defined output.
  2. The above circularity has caused frustration for local and national politicians who feel that the local plan policy target should be realistic and deliverable in practice, having been based on a realistic viability assessment which reflects the land value, the build costs and the developer margin.
  3. In response to these concerns NPPF2 proposes to set land values at the local plan stage, via an EUV Plus approach, rather than via the RICS Residual Land Value approach. This will require LAs and developers to debate, at the local plan public examination, what is the reasonable extent of the ‘Plus’ in EUV Plus. Recent land purchases will obviously reflect the actual price paid for sites and good strong evidence on this will be difficult to rebut, provided they relate to policy compliant schemes. The aim is that the recommended use of comparables should ensure that the agreed local land value, (which will then help define the amount of affordable housing), will be deliverable on the ground.
  4. Clearly every site is different but the new approach places the onus firmly on the local plan examination process to produce a robust open debate on the local value of greenfield land which ensures that the scale of affordable housing and other obligations will support:
    • A viable developer margin at a sensible land value assumption; and,
    • Housing land values which will incentivise rational landowners to sell.

LOOKING FORWARD

  1.  In some respects, the position is actually not much changed. Many local plan policies already base their local plan affordable housing targets on a consultancy study using the EUV Plus approach. Having done some of these studies whilst in consultancy I would broadly endorse George Venning HERE when he says that, in relation to land value, it often boils down to simply ensuring a ‘Yes’ to all these 4 questions:
  • Will then the landowner get at least c£200k per net acre or more? In many locations this will need to be higher to incentivise rational landowners and bearing in mind that net acre is different to gross acre and net price per net acre is different than gross price per net acre;
  • Will the landowner get at least half the uplift created by the allocation/consent? (Shinfield decision);
  • Is the uplift at least 20% of EUV? (obviously of no relevance to greenfield sites);
  • Is the resultant land value greater than any other use which is or could be consented?
  1. The problem has been that hitherto, local plan policies, often for political reasons, have then gone on to set unrealistic and/or unclear affordable targets, poorly related to the actual market and costs evidence. This often leads to site-by-site viability negotiations at planning application stage as the target is excessive at Day 1;
  2. The big difference with the proposed new approach is the new aim for local plan affordable housing targets to be expressed as stricter requirements rather than as flexible targets, as currently. Whilst the guidance sensibly urges flexibility to reflect changed circumstances, achieving it meaningfully, within the confines of public examination, may actually be complex and lengthy. Policy requirements with more ‘teeth’ imposes a need for landowners and developers everywhere, to ensure evidenced representations at every public examination.  Otherwise the risk of undeliverable housing allocations is high.
  3. It slightly appears that the Government is aiming for a England-wide system which is more like London where most local plans have targets of 40/50% affordable housing but the Mayor does not require an affordable housing negotiation if 35% or more is being proposed. This approach was supported by Barratt and our current view is that the greater certainty, linked to less planning delay, is welcome. However, whilst in London many sites can support 35% affordable and also incentivise the landowner that will definitely not be the case in most places.  The recent Parkhurst Road Ltd vs SoS High Court decision provides a clear steer that viable local plan policies need to be adhered to.
  4. Affordable housing requirements will generally need to be way less than 35% in order to ensure (a) realistic land values, plus (b) a satisfactory developer margin and (c) a realistic build cost.
  5. Whilst housebuilders always crave cost and policy certainty, the reality is that the new approach must also ensure sufficient flexibility to allow for changing market conditions and build costs. And not to mention changing CIL and other infrastructure requirements. It must also ensure that landowners are incentivised to release their land. History tells us that land supply dries up when land receipts are forced down and there is simply no prospect of being able to CPO land for 300,000 homes per annum.

SUM UP

The five sum-up points would be;

  1. Viability seems likely to dominate the debate over NPPF2 and then will dominate future local plan examinations;
  2. The final outcome may look different from that currently being proposed;
  3. The aspirations of rational landowners need to be understood prior to introducing any changes to the land valuation process. At present land value needs to fund, inter alia, CIL, S106, on-site infrastructure, Capital Gains Tax, and SDLT. It is often an income-generating sole asset. Anyone who thinks the average land sale enables the landowner to make off with over £1m/acre in the hand is, in my experience, much mistaken. Recent hyperbole in this regard is not a sound basis for planning or taxation policy;
  4. Housebuilders hate high land prices. But we hate even more, a threat to the supply of our key raw material – land. A policy outcome which reduces land supply would be disastrous and would cut across the current momentum which has delivered a 74% increase in net housing supply over the last four years. Policy makers need a laser-like focus on this.  A failure to recognise current levels of land value capture does not assist the debate;
  5. It is important to avoid conflating two separate matters. Namely (a) perceived concerns over developers gaming the viability system via ‘price-paid’ and (b) the desire of some to hammer landowners simply because the planning system makes housing land valuable. Neither are good basis for policymaking and housing delivery. Local Plan policies need to ‘right price’ land to ensure great places are delivered with the right infrastructure and affordable housing. Clear and viable local plan policies which landowners and developers accept and understand, is undoubtedly the best means to achieve this. At Barratt we always aim to buy policy-compliant land and hence only c15% of our schemes ever involve a viability negotiation. But if polices change and more landowners are not willing to sell then that likely effect will be a reduction in the number of new homes we build.

 


2 Comments

GIVE LAND PROMOTERS A BREAK

When it comes to public perceptions it seems that housebuilders sit close to the bottom alongside land promoters, bankers and energy companies. Such negative views of land promoters are generally misplaced and therefore it was great to see Paul Campbell of Richborough Estates give such a reasoned defence of the land promoter sector on BBC’s Countryfile a couple of weeks ago (HERE).

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As we all know land promoters work with landowners to secure control of unconsented land, then achieve planning consent for housing and then bring the land to the market as development land. Barratt is the largest purchaser of such land in the UK, and deals with many of the major land promoters.

That experience has prompted my view that land promoters should actually be celebrated for the following reasons:

  1. They mean that more houses get built. Period. Without land promoters navigating the torrid UK planning system there would be far less consented housing land available for housebuilders and others to build on.
  2. They play by the rules in front of them. Put simply, if a local authority does not have a local plan or a 5YLS there is a good chance that planning permission should and will be granted. Playing by the rules in a highly risky environment should be applauded not criticised.
  3. Land promoters help keep land prices down. Yes they (and their landowner clients) always want the highest value for the particular piece of land they are marketing but the macro effect of more consented land is moderating land prices. This is only good for building up supply.
  4. We need land promoters more than ever. Since the recession some housebuilders are more risk averse and it is inconceivable that housebuilders alone, without landowners and land promoters, can secure enough planning consents to deliver 300,000 homes per year.
  5. Land promoters often don’t compete with housebuilders for land. When Barratt is looking for unconsented sites to control, and secure consent on, we generally aren’t looking for sites under 100 units. It simply doesn’t suit our approach to risk or our fast asset turn business model. Similarly sites for 5/10,000 units are more akin to major civil engineering or new settlement projects than the scale of opportunity which enables Barratt to easily produce great places for our customers. Albeit I can’t comment for other housebuilders.

The initial Letwin Review findings perhaps mark the first signs of a sensible change in attitude to land promoters. Letwin appears to have realised that, for the larger sites described in (5) above, land promoters can play a powerful role in introducing different players onto a site. Maybe mixing up large and small builders, and both market sale with PRS developers. Whilst market absorption rates will always be the key determinant of how quickly a site builds out, it seems that land promoters can and will introduce new approaches to site delivery which can help drive up the build rate on large sites. And it is vital that the planning system produces a full range of both larger and smaller housing sites to drive up delivery.