Philip Barnes – Blog


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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density (mix as we call it) is too low and perhaps too focused on upmarket 4/5 bed detached homes in order to address superseded mortgage market perceptions.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.


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EVER SEEN A HOUSE GET ON A TRAIN?

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

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

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

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

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

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

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

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

Mea culpa and note to self.

 

 

 

 

 

 


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DELIVERY GAP AGAIN

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

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

Consents

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

Build and sales rates

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

Solutions

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

Draft Local Plans

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