Private sector developers are responding to rising house prices and growing demand for more homes by increasing production and buying more land. With all three main political parties focused on policies to increase the rate of house building, this trend is set to gain momentum over the medium term.

Current household projections suggest that we require 240,000 new homes a year. The Labour party has responded by voicing its intention to build at least 200,000 new homes a year and the Liberal Democrats state that 300,000 new homes a year is necessary if we are to consider the backlog of demand that has built up over the years.

While the Conservatives have shied away from the numbers game, it has been the Coalition’s Government policy to encourage more housebuilding not only to provide more homes but also to stimulate the economy and create jobs.

In this pro-development climate, the players with the best access to finance and land are set to reap the greatest benefits. These tend to be the major housebuilders who can move quickly.

Their response is already reflected in data. At 174,471, the number of planning permissions granted for 2013 is the highest yearly figure since 2007 according to Glenigan. Last year’s number represents a 24% climb on 2012 and a 51% increase on 2011.

Housebuilding forecast

We forecast that the private sector will increase production by 8% a year in the five years to March 2018 at best – a total increase of 35% over the period. This results in an average output from private housebuilders of 107,000 new homes a year over the next five years.

This is a best case scenario which assumes support from Help to Buy and finance easing for small and medium builders. Historically, we have seen periods of similar growth 
in the 1980s and noughties but there is no precedent for faster growth over a sustained period.

Together with output from housing associations and local authorities, 
we expect housebuilding to increase to 167,000 new homes by 2018. Whilst this is an improvement, it is still short of the 240,000 new homes we need to meet household projections according to the Town and Country Planning Association (TCPA).

Land sales

Developers, which have succeeded in converting their strategic land holdings into planning permissions, are now seeking new sites.

Strong demand for a limited pool of sites continues to drive land price growth outside London. Savills data shows national greenfield development land values, excluding London, increased by 7.5% in the year to March 2014. Urban land values grew by 6.4% over the 
same period.

In the more buoyant markets of southern England, land prices have returned to peak 2007 values.

Builders Finance Fund

As part of a package of Government measures in the recent Budget to stimulate housebuilding, George Osborne announced a £525 million Builders Finance Fund introduced to help small and medium sized developers access finance to unlock 15,000 stalled homes. The fund is intended to support the delivery of housing schemes of between 15 and 250 units.

Small and medium builders were particularly hard hit by the economic downturn as many struggled to access finance. NHBC figures show that in 2006 companies producing under 100 units year accounted for 26% of all private building. Last year that figure was down to 14%.

Constraints remain

One major barrier is that the deposits they require are much greater than they used to be. Historically, builders could borrow up to 80/85% of the development cost, but since the downturn the amount banks will advance has generally dropped to 60/65%.

More and more developers are seeking alternative sources of finance. Smaller players in particular are increasingly relying on mezzanine funding, despite the higher costs of borrowing. However, bigger players still dominate the market. Last year companies delivering more than 500 units a year accounted for 73% of private building.

Access to sites is another issue for smaller companies. Analysis of land ownership using Glenigans data shows that the number of units controlled by smaller players stays more or less constant throughout the planning process. However, bigger housebuilders acquire more units further up the planning process. The top five housebuilders (Barratt, Persimmon, Bellway, Taylor Wimpey and Berkeley) control 10% of units at the 'outline plans submitted' stage. However, they control 23% of units at 'full permission'.

Taken from
Spotlight: What's Next for Residential Development?