Philip Barnes – Blog


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COMPETITION AND CONSOLIDATION

Lost count of the numbers of times the development sector has provided cast-iron (IMHO) evidence to prove housebuilders do not landbank.

But rather than feel satisfied that the issue seems to be going away the anti-builder brigade seem to just come up with more and more unfounded alternative facts about (a) cartel pricing or (b) gobbling up of smaller competitors.

Cartel pricing

Ref (a) nothing could be further than the truth from my perspective. What I see day in day out is fierce competition amongst large builders to secure land. Based on taking a commercial (and risky) view of the selling prices in the market.  Whatever anyone thinks about house prices (and affordability), they set the price of land.  There is nothing in this week’s house price data which reduces our risks in this regard.

And when we start building and selling, housebuilders act as price takers rather than price setters given that our main competition is the second hand market which comprises c90% of transactions. Housebuilding is a highly speculative and competitive environment and when the market is strong, as now, it drives strong profit performance. In contrast when the economy is weak we get hit first, hardest and for the longest.  We couldn’t pay our shareholders a dividend all the way from 2009 to 2013.  We are trying to manage the risks posed by a potential future downturn.  We sense it will come sometime but just don’t know when.

The idea that big housebuilders somehow act in cahoots in regards to either land prices or unit selling prices lacks any evidence (or logic) and will easily be dispelled by a conversation with any landowner, land promoter or land agent. Such a conversation may yield better insights than relying upon Twitter.

Consolidation

In relation to the consolidation of the industry it is perhaps worth making three points.

Firstly the big builders would be happy to see more smaller builders setting up and being successful and have made this point countless times. Smaller builders operate differently, often with lower operating costs but higher materials costs, and produce a different product. They generally compete more with the local second hand market than with us. They generate transactions and train people which is positive to everyone else in the sector.

A small development of 10 or 20 new homes in a town or village, if successful and well received, can often make it easier for the volume builders to follow on with a larger scheme with more affordable housing.

Secondly I would bow to John Tutte, CEO of Redrow in a recent interview HERE where he makes the point that the recent Redrow acquisition of Radleigh Homes will lead to greater housing delivery not less. Redrow will drive far more units out of the Radleigh operation than Radleigh themselves would have done. When builders acquire other builders it is usually to help drive up volume not to squash it.

And thirdly lets remember this isn’t a housing thing. Look at the consolidation in the car making sector, from over 500 British car makers down to 35, mainly very small niche operations plus a handful of global businesses. And the British high street – now dominated by a few big brands rather than the previous mix of nationals and locals. And try getting a coffee in many places if you don’t like Costa, Nero, or Starbucks.

I don’t recall a Coffee White Paper promoting financial and planning measures to support and develop more local cafes to break a mythical cartel. Albeit I would fully support such a proposal!

So in summary lets remember (and address) the real causes of the lack of diversity in the housing sector. Namely:

  • the ridiculously high entry costs and risks caused by the planning system
  • the lack of bank lending since the global financial crisis.

There are plenty of small sites around – the task is now to help the smaller operators gain access to them.  That starts with positively identifying them in a plan or other planning document and then providing low cost risk-free market access based on planning certainty.


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NEW CIVIC HOUSEBUILDING

At Barratt we were pleased to be invited to give a housebuilder response to the launch of Shelter’s recent report on New Civic Housebuilding (NCH). Albeit that upon arrival it didn’t feel like a particularly housebuilder friendly atmosphere. Flicking through the report I could understand why. The headlines in the executive summary were that speculative housebuilding reduces community benefits, doesn’t make homes more affordable, doesn’t build enough homes and squeezes out SME developers.

Luckily Toby Lloyd, who co-wrote the report and gave an excellent presentation on the contents, quickly confirmed that the report makes no criticisms of housebuilders, simply the economic model they work within. Indeed, it was accepted that housebuilders behave rationally given the circumstances we face.

The presentation was persuasive. Essentially NCH would create a new and additional supply of homes whereby land would be purchased by a state owned, “development corporation with powers” at a low land price. The corporation would then grant planning permission to local authorities to build large numbers of high quality new homes with local community support.  Indeed it was particularly good to see our development at Derwenthorpe in York, a partnership with the Joseph Rowntree Housing Trust, highlighted as an exemplar example of NCH.

What’s not to like?

Nothing. Cheap land, abundant planning consents and fast paced delivery of more homes. However, as Barratt is the largest purchaser of residential land and builds more homes than anybody else, I immediately felt drawn to the details and the practicalities.

And a few questions emerged.

Firstly, the notion of cheap land prices? Barratt invests over £1bn on land each year and our experience is that most landowners tend to prefer high land prices rather than low ones. Of course the State can use its powers to buy land, without landowner consent, but a land valuation precedes such an acquisition.

The valuation process is pretty straightforward. As per regulations and case law, the State identifies what the land is to be used for. If the future use is housing then the land is valued as such. Housing is a high value land use, irrespective of whether the landowner wishes to sell and this inevitably poses a challenge to the New Civic Housebuilding Model.

Notions of large scale land assembly at agricultural land value seem unlikely to work  by virtue of the legal position and landowner aspirations. The only way to address this would be if the Government embraced the difficulties of introducing a development land tax or changed the compulsory purchase regulations. On this point Barratt sees little prospect of this. Indeed we perhaps share the view of the Centre for Progressive Capitalism who recently described land value taxation as a ‘theoretical silver bullet, which the UK is not currently set up to implement even if it were politically feasible’.  In this context Barratt will continue to try and drive up the building of new homes given the circumstances we face. In this regard we have increased output by 55% over the last 5 years.

Secondly the notion of a “development corporation with powers” captured the attention. Again the Barratt experience is that localism is now embedded within the UK planning system and many local communities are keen to exercise the power and influence they now have. It is often within the areas of greatest housing need where residents feel most empowered.

It seems counter intuitive to think that the new housing estates that have been successfully resisted by local residents will become acceptable to them if promoted for public housing by the new “development corporation with powers”. One thing is clear. Giving local communities powers via localism is likely to prove far easier than taking those powers away via a new development corporation.

And finally we noted that the presentation made no reference to the skills shortages that NCH will need to overcome. Barratt is in a constant battle to secure the skills and resources both internally and within our supply chain, to support our growth aspirations.  NCH will obviously face similar challenges.

So the New Civic Housebuilding idea is undoubtedly alluring. However, from a housebuilder’s  perspective, when it is tested against some of  the practical planning, legal and market difficulties of building more homes it raises significant questions which need further analysis.

In this regard it is not unusual. A similar path was trod by Tim Leunig’s Community Land Auctions idea, albeit coming from a very different starting position. Even the plan-led system, 27 years after introduction, has not driven up housing delivery despite the unshakeable belief from most practitioners that it will.

At Barratt we hope that the new Housing White Paper survives the election in tact, whoever wins. We we feel it is a positive robust document which should help us and others to increase housing delivery. And despite the criticisms of the speculative housing model Barratt will continue to remind people that in 2016 we built over 17,000 homes (of which over 3000 were affordable), we supported 56,000 jobs, contributed £674m in tax, gave work to 13,000 UK businesses and created 4,382 new school places.


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HOUSING WHITE PAPER AND GREEN BELT

All we hear these days is that Green Belt policy in the Housing White Paper is unchanged. Not sure I see at that way.

Why? Because the longstanding principle that exceptional circumstances cannot be defined (because they are exceptional) appears to have been pushed aside. Paragraph 39 appears to do exactly that.  It confirms that Green Belt boundaries can only be amended when other options (which are then helpfully defined) have all been examined AND where local policies ensure the impact will be offset (again guidance on how to do this offsetting is provided).

In effect a sequential approach applies – GB releases can be allowed if there are no other options to meet the defined housing need plus some offsetting provisions.

Elsewhere in the document, most notably at paragraphs:

  • 1.6 – 1.9 (getting plans in place)
  • 1.12 – 1.15 (assessing housing requirements)
  • 2.47 – 2.51 (housing delivery test)
  • it seems that the Government expects housing need to be accurately assessed, defined in a local plan and then sanctions will result if supply dips under the assessed requirements.

That must feel a bit like a rock or a hard place for the 100 or so anti-development LAs who have traditionally defined artificially low targets, citing capacity constraints due to Green Belt and then deliberately undersupplied. Going forward, under the HWP if you cannot meet your own need on non-Green Belt land, and neither can your neighbours, then the defined exceptional circumstances which necessitate Green Belt releases are in play.

Of course paragraph 1.22 of the HWP stills provides a ‘get out’ by saying that other NPPF development constraint policies can provide a justification for not meeting need. And Green Belt is one of those. Nevertheless it feels like HWP is providing fewer opportunities for these recalcitrant GB LAs to duck the issue of meeting their housing needs.

Albeit lets see what the NPPF changes actually say when published in the summer.

So what does this means for planners? Well in areas like Cambridge perhaps very little. Major GB releases can (some would argue should) be avoided by exporting the need beyond the Green Belt to non-GB areas within the same housing market area. Undoubtedly less stainable but it preserves the sanctity of the green belt.

But for LAs around Birmingham, Manchester, London and Bristol the position perhaps appears more difficult. Here it will not be possible to simply export the need beyond the green belt into a completely separate housing market area. Needs are to be met and green belt releases are fully justified by the newly defined exceptional circumstances in the HWP.

This ‘new’ policy is sensible. It is plainly wrong that towns and villages within green belt, located where employment and housing needs are strongest, (and affordability worst) have historically been free to avoid releasing land because the ‘presumption in favour’ carries no weight there.

Whilst, at the same time, other similar settlements in less sustainable locations, and often more sensitive countryside, have soaked up high housing numbers year after year. Some of them bombarded by planning applications benefitting from the presumption in favour.

But two key questions remain:

1. Is this optimism naive? Are the conclusions derived simply from an unintended loophole which, will soon be closed off via the NPPF changes?

2. Even if the policy is a deliberate attempt to increase housing output where most needed will it actually change behaviours in anti-housing LAs? Some have successfully gamed the system for decades and will perhaps find a way to continue?

But as of now my view is that the HWP is clearly signposting harder times for those anti-development Green Belt LAs. That is a good thing thing and needs to be applauded.

It also gives more justification to the courageous planners and civic leaders in Manchester, Birmingham and Oxford to stay the course on their bold plans to match economic growth with housing growth via a sensible approach to growth on the urban edge.

Perhaps ironic that as we trigger Article 50 we are maybe introducing a more European approach to the urban edges of our great cities.


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OF COURSE WE TEND TO BUILD BIGGER HOMES WHERE NEEDS ARE GREATEST

Every now and then you see something so annoying, yet equally so obvious, that you want to shout.

And so it was with Neil Hudson’s (as always) excellent recent map found below.

Neal Hudson Supply Map

It shows that in the areas where there is the greatest need for more smaller homes to address affordability issues and enable market access – we in the industry actually tend to build our larger homes.

And when you think about it…..of course we would.

The greatest needs tend to be around the larger and/or more affluent cities where Green Belt or settlement policies kick in. The areas where desire to build is greatest but our opportunity to do so is least. So with such strong demand linked to the most stringent cap on unit numbers what do we do? Its obvious – we tend to increase the size of the product to secure the greatest amount of saleable floor space from a capped number of units.

So in effect we tend to maximise our build aspiration per dwelling rather than, as we would like, by building more units. Our residual land value model will tend push to higher unit sizes where unit numbers are capped AND demand need is strong.

Crazy – Yes. Easy solution – Yes.

Simply make it easier to increase density either before or after outline consent is granted. Nothing new, just go back to the 2010 DCLG Guidance on Greater Flexibility for Planning Permissions. Barratt obviously wants to build more units where the demand and need is there.

The Housing White Paper is tantalisingly positive in this regard. In particular Barratt will definitely respond positively to paragraph 1.54 which asks for ideas on how planning Policy can increase density.  I know already what we will be saying….


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HOUSING AND INFRASTRUCTURE

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

Several things particularly stood out.

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

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

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

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

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

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

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

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

 

 

 

 

 


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DENSITY AND VOLUME

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

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

Three key reasons:

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

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

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

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

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

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

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

Here’s hoping.


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SIMPLE WAY OF INCREASING HOUSING DELIVERY

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

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

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

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

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

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

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

What’s Happening

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

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

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

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

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

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

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

In summary:

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

So What Needs to Happen?

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

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

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

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