What is happening in the residential development market?

Overall levels of housebuilding activity remain low, with starts at less than 55% of pre-downturn levels in England, Scotland and Wales. The land market is ticking along, with value growth during the third quarter of 2012 of 0.7% for greenfield and 0.4% for urban land, excluding London where values are up 4.6% over six months.

So why are housebuilders reporting record increases in profit?

Housebuilder margins are recovering after the disastrous downturn of 2009. The major housebuilders have recapitalised and are building out sites acquired at or written down to lower values. Land acquisition and development is now structured to create early cash flow and margin on scarce capital.

Is the problem the planning system, or is it demand?

The primary problem is scarcity of finance, which is constraining mortgage reliant demand for housing. On the other hand, the cost and speed of the planning system is frustrating development activity. There is also a real issue with planning obligations where they do not reflect the current economics of development in local markets.

Will the government’s measures to boost housebuilding have any impact?

Some of the measures, targeted at getting first time buyers on the housing ladder and providing development funding, have a proven track record and will add to delivery.

The government’s Funding for Lending scheme (FLS) seems to be the one to watch. Although opinion is split on whether this will improve mortgage volumes, it appears to be pushing down the cost of mortgage lending through the government-backed NewBuy scheme.

Bank of England survey data indicates further improvements in the cost and availability of mortgages as a result of FLS, although wider opinion in the financial sector seems to be split on whether FLS will lead to an increase in mortgage volumes.

Moves by the Financial Services Authority to loosen capital ratio rules, as they apply to FLS lending, could be helpful.

With these measures in place, the prospects for an upturn in active demand for new homes in 2013 are significant. This is reinforced by the consensus view that economic growth will pick up in 2013, provided it is not blown off course by headwinds from the eurozone, China or the US.

If the prospects are positive, why renegotiate planning obligations?

The National Planning Policy Framework is clear that planning obligations should allow for a competitive return to both developer and landowner. Where existing Section 106 agreements suppress land value to below a viable level, renegotiation will unlock activity and growth.

How much growth will come from increased house building?

Analysis completed by Oxford Economics in 2010 indicated that building an extra 100,000 homes per annum would add 1% to GDP after two years. This counts as a political imperative to increase levels of housebuilding, alongside the economic and social case to fix the country’s long running shortfall of new homes.

Taken from
Residential Property Focus Q4 2012