Philip Barnes – Blog


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WARD HADAWAY/HCA HOUSEBUILDER SEMINAR

Set down below are some very rough notes from the interesting Ward Hadaway/HCA seminar for housebuilders in Newcastle. There were three presentations. Two from WH (planning matters and legal matters) plus one from the HCA. Apologies in advance if any of the details have been skewed in the drafting

WARD HADAWAY/HOMES AND COMMUNITIES AGENCY SEMINAR

PRESENTATION 1 – PLANNING MATTERS

VILLAGE GREENS
Royal Assent for new provisions – 25 April.
Positive news for developers – ends the 20 year “as of right” usage of private land for village green. The landowner can make a statement that they do not intend to allow public uses to continue before or after 20 years.
If already 20 years of public usage the village green application has to be made within 1 year of the notice to end such uses.
Also a restriction on rights to apply for village green status. If there is a “trigger event” (application or allocation) village green application cannot be made.

STOPPING UP HIGHWAYS
New provisions in Growth and Infrastructure Bill mean that stopping up applications (under S247/257 of the Act) can be made without having to wait for planning permission.

SECTION 106 AGREEMENTS
Developers can now apply to amend S106 Agreements (pre 2013) but only in relation to affordable housing provisions which make a development “economically unviable”. LA has 4 weeks to determine.
Can apply to on site and off site affordable housing provision

COMMUNITY INFRASTRUCTURE LEVY
Developers will not be charged CIL twice via a Section 73 application following payments made pursuant to the original grant of consent. (Had been a worry)
New changes will allow LPAs to set different levels of levy relating to scale of a development.
Developers need to be aware that S106 Agreements will still be needed for affordable housing and on-site facilities.
New restrictions are aimed at ensuring developers are not charged twice for the same highways works – once by CIL and once by S278 Agreement

OFFICE TO RESIDENTIAL
Now legal without permission subject to no external alteration

JUDICIAL REVIEW PERIOD
Proposed to be reduced to 6 weeks.

APPLICATIONS DIRECT TO SECRETARY OF STATE
Developers have option to apply direct to SoS in “poor performing areas” – criteria for identifying such areas yet to be defined

PRESENTATION 2 – LEGAL MATTERS

HEADS OF TERMS GUIDANCE
Heads of Terms should clearly identify the site, together with areas of 3rd party rights.
Timescales for the deal need to be defined.
Security should be defined. Generally 4 alternatives:
1 – Parent company guarantee.
2 – Bank guarantee.
3 – Phased land transfer with requirement for upfront works.
4 – Legal charge – provides comeback rights for the landowner in the event of non completion.
Legal charges need to be formally registered and once the debt has been paid the charge must be released.
Obligations on the developer should be clearly set eg with reference to commercial terms rather than simply “best endeavours” or ” reasonable endeavours”. Timescales for such obligations should be clear.

OVERAGE
Generally 3 types of overage provisions – relating to:
1. Enhanced sales revenue
2. Enhanced planning permission
3. Change of Use to more valuable use
Sometimes there are several types of overage in a single deal. Here it needs be clear there is no double counting
Crucial to specify how overage triggers are to be reported and be clear on timing.
Likely to be phased overage on bigger sites. Developers need to ensure if losses on later phases then any overage paid on early phases is clawed back.
If part exchanges are involved in the development then developers should not pay overage until all part-ex deals are completed.
Need to ensure all costs are offset against overage requirements.
A worked example calculation within the contract is crucial to provide clarity. Helps all parties later.

LAND ACQUISITION STRUCTURES
Generally 5 types of structures in play:
1. Exclusivity Agreement – provides simple lock out to enable a negotiation to take place. Often they come with a fee for the developer.
2. Conditional Agreement – generally for short term deals and usually conditional to “satisfactory” planning permission and/or “satisfactory” site survey. Deposits tend to be returnable. Generally more straightforward than an option. Key issue is where planning permission includes viability condition.
3. Option Agreement – generally for longer term land deal with a “reasonable endeavours” clause to ensure site is promoted properly by the developer. Generally most flexible for developers and best alternative for assembling multi ownership sites. Right of termination is useful for the developer.Deposits are usually non returnable.
4. Promotion Agreement – developer has right to promote site and then get a share of the sale proceeds on open market. Risky for housebuilders as they need to fund promotion but don’t then necessarily have the right to acquire the site. (Although they do get a share of the sale proceeds to another developer which should easily cover promotion costs)
5. Development Agreement – Landowner retains land but there is an agreement whereby the developer develops with a deal to split the revenue proceeds.

PRESENTATION 3 – HOMES AND COMMUNITIES AGENCY

5 KEY AREAS FOR HCA ACTIVITY
1. Affordable Housing – funding RSL schemes
2. Housing market interventions – making private sector schemes happen
3. Public land – bringing public land forward for kore housing more quickly
4. Economic assets Programme – better value from public economic development assets (ex RDA land and assets) and recycling those funds
5. Regulation of social housing – TSA etc. robust regulation to improve performance.

GOVERNMENT INITIATIVES
Budget 2013 was a clear signal of intent for housing. Publicity for H2B has overshadowed the Help to Rent scheme which itself got £800m of funding.
Both Government and LAs understand how important it is to encourage housebuilding to generate jobs and economic growth.
One key issue is the need to finalise the Comprehensive Spending Review so that more funding certainty is in place for the period beyond 2015
Affordable Homes – £4.8bn to build 170000 homes. £2.1bn for Decent Homes.
Greater focus on tackling empty homes and shops which are blighting neighbourhoods and high streets.
Build to Rent is simple gap funding of PRS new build projects. Bidding process.
HCA have a role in mediating affordable housing levels between developers and LAs
With H2B HCA take the 20% equity stake and risk. So the purchase price, for mortgage purposes, is 20% less.
Delivery role in NE – key priorities – Cherry Knowle, St George’s. Both out to procurement. Also sorting out difficult existing sites eg Middlehaven/North Shore
New “build now pay later model” is being pushed by the HCA
HCA is now sorting out its strategy re the ex RDA assets. Big involvement in EZs and bringing forward business and industrial land. Current NE priority is the new facility next to Narec in Blyth.
Building for Business – £50m deal with UK Land which will ensure more jobs created.


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WILL TAXING LAND BANKS SPEED UP HOUSING DELIVERY?

One of the things I love most about Twitter is the speed you get informed opinion, from both sides of the debate, on the key issues relating to the housing crisis. In recent weeks its been Help to Buy with the debate showing a clear split between those concerned about house price increases and those welcoming the boost to supply. The former seem to outnumber the latter.

This week the issue is land banks – more particularly the suggestion by the IMF that developers holding onto development land should be taxed. The twittersphere seems, at first blush, to be generally supportive. As with last weeks post on H2B I wouldn’t pretend to have all the answers but am happy to set down a few observations.

State Intervention in the Market

Firstly it seems that many of the opponents of H2B came from the standpoint of unnecessary Government intervention into a free market. Some of the same commentators seem now to be supporting state market intervention by means of taxing “idle” development land. The reality of course is that the housing market is already state controlled in that the planning process controls the level of units to be sold, cognisant of population growth but largely ignorant of market factors. If demand for cars goes up carmakers make and sell more cars. Not so housebuilders. If demand (or even need) goes up the state’s planning system has shown itself to be consistently unresponsive in allowing more homes to be consented and hence built and sold.

In my view thank goodness for state control. We only have to look at Ireland, Spain or the banking sector to see the folly of an unconstrained housing market. However the balance is now wrong. Housing is recognised as a human right by the Human Rights Act and a positive public and private sector response to the housing crisis is required. Between 1931 and 1934 private sector housing output over doubled. Don’t tell me that such a scale of increase wasn’t the result of both sectors working together to create homes and jobs. Cheap finance, positive planning and willing housebuilders were critical.

Seeking a Normal Market

Everyone seems to want a return to a “normal” market or an efficient anti boom/bust model like in Holland or Germany. There is clearly no “normal” in a state controlled market but surely we should look to the conditions of the 1970’s. Positive planning for growth by all local authorities, 5-10% deposit levels, generally stable prices and significant funding for social housing.

And comparisons with Europe? Population density is greater in Holland yet it does not stop the introduction of positive urban growth strategies which actually deliver the homes and jobs needed.

The Policy Paradox

Everyone is acutely aware of the Gordian knot which means in the short term the Government does not wish to countenance significant price falls yet in the medium term this is necessary to deliver Government objectives to improve housing market access. The IMF was clear that the way to slip this knot must be greater commitment and action to increase supply. Indeed they pointed out the unhelpful role Green Belts play in denying this increase. IMF, in my opinion, did not say H2B was bad policy, simply that it would be bad policy without a supply increase. This is evidently true – without more supply it’s only effect would be to increase prices and, with a rising population and static incomes, worsen market access.

What is a Land Bank?

On land banks it would be interesting to know how much the IMF researched the UK planning system before it talked about taxing unused development land. The first question must be what type of land can be regarded as “land bank” and is therefore theoretically taxable.

Firstly lets consider land with planning permission. This is the only source of land which is capable of being built on. There is only around 400k units of this consented land. This is around 2 years supply. Most of us who work in housing believe this is actually too way too small a land bank and reflects an inefficient planning system.

Many of the 400k units will be under construction and there will also be some sites in the land bank which are not being developed because they are now simply not viable. The proposed mix and product will probably be getting changed by the developer as we speak. Taxing developers as they approach this tough task of trying to make such sites viable seems counter productive to an objective of getting more homes built.

What About Developer Owned Land?

Another potential source of land for the land bank tax might therefore be ANY land owned by a landowner, developer or housebuilder – even if it doesn’t have planning permission? Should all such land be taxed? This also seems illogical for a number of reasons.

Firstly, without planning permission, such land can’t be built on so simply can’t be regarded as “idle” or “land banked” land.
Secondly a definition solely by ownership effectively renders all land in the UK as forming part of a land bank. Whether land is owned by a developer or the National Trust – without planning permission it’s status is the same – namely that it can’t be built on. If developer owned land is to be taxed then all land would similarly need to be taxed.

Of course developer owned land has a purpose – to be developed in the future. However there remain clear logic gaps in assuming that taxing such land will increase new homes delivery.

Firstly such land is usually controlled by means of an option agreement rather than ownership. The price of that option will reflect the location of the land and risk/reward nature of the development process. The land tax may be a greater cost than the speculative option investment thereby further disincentivising developers in securing longer term land interests. In my view this would be a counter productive as developers need to encouraged to take a long term forward facing approach to land acquisition and delivery. Encouraging them to live hand to mouth only buying buying short term sites is not, in my opinion, the way to encourage housebuilders to commit to the long term delivery of the new homes and infrastructure that the country needs.

Secondly not all developer owned land will realise its development potential. Some will secure consent and some won’t – that is the nature of the state controlled planning and development process in this country. It would appear extremely difficult to tax land simply on the possibility it may secure planning permission at some unspecified date in the future.

Lessons

The housing paradox is clear. Prices need to fall to ease market access but it will be extremely difficult to get developers to invest strongly into a falling market. Not to mention the political unacceptability. For me the best recent analysis of a potential route through the paradox came from Frances Coppola arguing for separate short and long term strategies. http://blogs.lse.ac.uk/politicsandpolicy/archives/33684?utm_source=buffer&utm_medium=twitter&utm_campaign=Buffer&utm_content=buffer46274
The only simple thing we do know is that housebuilders, for the first time in 5 years, have an appetite to invest and build. Now, more than ever, is the time for the planning system to respond. In particular we need an a unbuckling of the Green Belt where it is strangling city growth and housing aspiration. Developers need to be incentivised to bring forward land into the planning process now. That can only be achieved via tangible and positive results from the planning system. Which brings us all back to Localism and the power of NIMBYs…….


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HELP TO BUY OR HELP TO BUST?

Town planning is all about balance. Scales can easily tip either too far towards economic growth or too far towards environmental protection. I hesitate to think about shades of grey but I am certainly struck by the binary nature of the town planning discussion at the moment? For one side new greenfield housing is neither necessary nor wanted whilst on the other the failure to build is simply generational theft.

Whilst frustrating twas ever thus. It used to be CPRE vs HBF. Now it seems to be Sir Simon Jenkins vs CBI. The Governments Help to Buy scheme, launched in the budget, seems to be the most recent manifestation of the polarised nature of the debate. The responses seem to fall into two camps. Firstly that it  will cause an unwelcome house price bubble or secondly that it will bring a much welcome boost to supply.  No one seems to be occupying the middle ground namely whether this is a policy which brings real prospects of increased housebuilding activity but also brings demand side risks which need to be carefully monitored and managed.

For the first few weeks after the budget we saw an avalanche of hostile criticism – much of it derived from the view that it would artificially inflate demand thus giving rise to a sub prime lending crisis. Conversely the HBF were delighted, sensing the opportunity of increased volumes and,  potentially,  margin.

What is the real position? I am certainly not going to claim to know –  rather my aim is simply to give some perspectives on the issues at play.

Firstly it seems irrefutable to me that H2B will increase supply. All the evidence I see is that there is a group of potential buyers in the marketplace who can service a mortgage but cannot raise 20% deposit. H2B will enable those people to secure a new build property and the house builders will respond.

At a macro level increased supply will ease the supply demand imbalance and therefore, potentially, cool prices. However the structural market imbalance is so great that the relatively limited impact on supply will be outweighed by the demand stimulus described above. Therefore prices seem likely to rise in the short term.  In terms of whether this could cause a price bubble or another sub prime crisis those fears seem unfounded for 5 reasons.

 Firstly the scheme is only available on capital repayment mortgages. The glut of easily serviceable interest only mortgages, lacking cover,  was a key factor in the last crisis. Secondly borrowers will need to be able to demonstrate that their earnings can service their debt. This contrasts sharply with some lending practices during the boom. Thirdly borrowers will still need a 5% deposit – there won’t be any 125% mortgage options this time around. Fourthly whilst it will stimulate demand it will also create a positive supply side response as, an albeit limited, counterbalance. Finally it must be remembered it is a time limited policy lasting only for 3 years. If the externalities are demonstrably negative then clearly it will be withdrawn whereas if we do see significant benefits from the the supply boost it could perhaps be extended.

As a planner I can’t help but welcome the initiative as it will undoubtedly help create better conditions to get more homes built. The lack of supply over the last 2 or 3 decades is, in my opinion, the root cause of the crisis. However I am very conscious of the concerns of some economists and housing professionals about an artificial demand boost which will likely lead to housing becoming even further out of the reach of first time or second time buyers.

All in all H2B shines more light on the huge political paradox surrounding housing policy. Namely that the Government MUST get housing supply up to address the housing crisis but it does not want to see price falls – no matter how much the economics of housing policy indicate that price falls are necessary to address the crisis. Re-election in 2015 relies on a feel good factor in Middle England. For existing homeowners (c15m people) rising house prices is a key barometer of how well a government is doing and the political reality is that if this Government wants to win another term it needs stable or rising house prices. Politically, H2B will help achieve this.

In my view rising supply, price stability and measures to increase housing access for lower income households needs to be the policy focus. Whether it be a wave of Council housebuilding,  measures to build more private rented homes or further measures to boost owner occupation, one thing is clear – Britain needs to get building to give younger families a better future.


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THE GREAT COUNCIL HOUSE GIVEAWAY!

As the dust settles on the death and legacy of Mrs Thatcher the polarisation of opinion left me questioning whether attitudes towards her should be so binary – good or evil? I was a teenager at the time she came to power and like many have slightly changed my mind over the years.

During her first term of office when I was at university I spent perhaps too much time shaking Help the Miners buckets and pinning Coal Not Dole stickers on people. I was in a crowd that landed eggs on Heseltine’s blond locks and got up at 4am to get the bus to picket lines in darkest Lancashire. As a proud North Easterner I felt it was my duty.

But watching The Likely Lads on BBC4 last week reminded me what a miserable place UK was in the mid-70s. Our paltry tally of 3 gold medals at the 76 Olympics was a cause of embarrassment rather than pride. Somewhat different to London 2012, and economically we really were the sick man of Europe.

So with the benefit of middle-aged hindsight I think I can now accept that something significant had to change. As far as the North East is concerned the debate rages as to the pace and effect of that change. Despite the justified anger about pit and shipyard closures the wholesale give away of council housing remains, in my view, one of the most unattractive of Thatcherite policies.

At the time the policy seemed completely victim free. The government would actually sell you your council house at massive market subsidy. It helped address the aspiration for home ownership, it allowed lower income families to get a rung on the housing ladder and it helped create a house price boost which made everyone feel good and made more people want to buy. Everyone was a winner it seemed.

How wrong we were. No one seemed to make the connection between the sell offs and the cutbacks in Government spending which meant no more council houses would be built again. A source of new housing supply which had yielded around 4 million family houses between 1946 and 1978. So with new social housing supply being cut and the existing stock haemorrhaging into the owner occupied sector there was little left to satiate the demand for social housing from lower income households.

Add in population growth and the growth of nimbyism (making it far more difficult to build private homes) the effect was obvious – huge increases in prices and a crisis for those in social housing need. For those currently in nice homes who don’t believe there is a housing crisis it’s worth remembering that in the North East alone we now have 2,000 homeless people, 90,000 on a waiting list and the population is growing by 5,500 people per year.

The newly formed housing associations have done their best since the 70s to increase supply but what right-to-buy did was help to create a structural shift in the housing market which directly contributed the current housing crisis. Many did well out of it at the time but the younger households of today struggling to get a home of any sort have clearly not been so lucky.

So what needs to be done? Firstly we could think about a new wave of Council housebuilding to replace the losses. Such investment would create jobs, lift confidence and address the housing crisis. Importantly it would generate rents which would soon pay back the costs of construction.

From a North East perspective policy makers need to give a far higher priority to accelerating the amount of private housebuilding, exactly as the national Government wants.

Lord Adonis’ Economic Review of the North East was published last month. It is a hugely positive start. It makes clear the need to address years of housing under provision and sends a clear message to both local authorities and to the forthcoming Combined Authority which will become operational in 2014.

In Newcastle where housing output last year was minus 100 compared to a target of plus 800 the need for change is particularly acute. The new chief executive Pat Ritchie and changes in senior officers offer real hope in this regard, and there’s certainly no time to lose.