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Developers struggle to see the light at the end of the tunnel

Graham Wellesley, CEO

September 5, 2016

house-construction-1407499_1920-825x510When broaching the topic of housing supply and demand in the UK, the discourse is rarely simple.

New uncertainties arrive daily – each carrying with it different implications for the property market.

Post-Brexit, the UK economy is currently experiencing what many economists are calling a ‘mild recession’, as sterling falls to its lowest rate since 2009 and the economy shrinks – hopefully temporarily. So what does this mean for the UK housing market?

In simple terms, this serves to exacerbate the already embedded housing problem. There is a fundamental disconnect between housing supply and demand – not least for the developers that face increasing costs, be it from lengthy and unregulated planning permissions or lack of access to public land, through to increasing demand from buyers.

The root cause of the housing supply issue can be broadly categorised into three parts:

  1. Expensive and onerous planning permissions
  2. Lack of access to public sector land
  3. Dwindling supply of skilled labour

Across the UK, the planning permission process put in place by local councils can be completely different, which makes it increasingly difficult to predict how long it might take to approve a development. This added time raises the costs even more for developers looking to build.

Solving this would mean rallying the government to create a uniform planning permission process that works across all local councils and which is streamlined and effective. In March, the chancellor announced measures to speed up the planning system, which included reducing the number of stages developers go through, by 2017. Developers can then start to build in parts of the UK that have a heavy undersupply of housing and can address the continued focus on London. In reality, it would seem we are still waiting for these changes to start having an impact – and 2017 is drawing ever nearer.

The Department for Communities and Local Government (DCLG) has a target to release land to build 160,000 homes by the end of the decade. According to recent reports, the DCLG is only between 5 and 8% of the way into its target.

It should come as no surprise then that property developers are struggling to see the light at the end of the tunnel and to remain positive about the housing outlook. The government’s commitment to releasing this public sector land across the UK is positive but, with the slow progress, more needs to be done to address the undersupply of housing.

Converting commercial space into residential housing could be a solution to the lack of access to public sector land. Again, this comes up against the pace at which this land is released to developers and approved as residential land – it’s simply too slow. Using greenbelt land and converting it into residential is also an option. The greenbelt isn’t without controversy, though, as it is protected land which even the mayor of London has vowed to preserve. Many developers might be hesitant to build on it even if allowed, and there is a whole raft of restrictions for developments once they begin building.

A lack of a skilled labour force adds to the weight of this problem. The implications of Brexit on skilled labour in this sector could add even more of a strain, as the movement of skilled labour from EU countries may become more difficult.

In London, the plans for addressing the undersupply of affordable housing have been communicated passionately by Sadiq Khan. One of his key policies for London is that 35% of the properties built by every developer should be made ‘genuinely affordable’. The difficulty with this is that these properties can only be built in parts of London where it is viable and the land is available – hence driving costs up, and slowing the process down even more. Buyers and renters are still struggling to afford properties, as the lack of supply and increasing costs for developers are still driving house prices up, despite interest rates currently being at their lowest ever.

Discussing the recent drop in property prices – a post-Brexit side-effect – the Labour leader Jeremy Corbyn has said that this might help tackle the housing crisis. To some extent, this may be true but, without speedier and more cost-effective processes, prices will still end up being out of reach for many. Developers need to work with the government to solve the housing supply issue, but there will be no silver bullet. Currently, housing supply moves at a much slower pace – as if stuck in tar – while the demand rushes on at an accelerating rate. A uniform planning process, better incentives and training for labour, along with the faster release of public sector land from the government, are necessary to stop this perpetual state of ‘crisis’.

That being said, development isn’t for the faint-hearted. Lenders and those involved in the planning permission process will be looking for thoroughly thought out proposals and a strong track record. Having those in place will ensure developers are doing all they can to speed up the approvals process. It’s then down to government at both a national and local level to streamline, simplify and expedite planning process and legalisation to enable Britain’s developers to get building.

 

This article was written by Graham Wellesley for Development Finance Today