Source: Paul Burroughs
Legal & General Investment Management Real Assets brought together a range of experts at this year’s RESI Conference to debate how the residential sector can overcome the challenges of a growing population and take advantage of innovative technologies to speed up the delivery of new homes across all tenures.
With a new housing minister in place, the build-to-rent (BTR) sector gaining ground and innovative new concepts like modular construction and micro flats coming to the fore - not to mention the challenges of Brexit - the residential development market is going through a period of unprecedented change.
Meanwhile, the longer-term problem of how to increase the supply of new housing to meet the needs of the UK’s growing population remains unsolved.
Legal & General Investment Management Real Assets has been at the forefront of tackling some of these issues, committing to a modular housing production facility in Leeds and being one of the first institutional lenders in the UK to invest in purpose-built private rented sector (PRS) assets.
At Property Week’s RESI Conference, the firm gathered experts from across the sector to discuss how the industry can overcome these short-term economic and political road bumps and take advantage of the opportunities offered by new technologies and development models in order to accelerate the delivery of new homes across all tenures.
Rita Akushie, group finance director, Thames Valley Housing
Faraz Baber, director, Terence O’Rourke
Dan Batterton, fund manager - build-to-rent, LGIM Real Assets
Alan Collett, chair of the group investment committee, Hyde Housing Group
Nick Cuff, land director, Pocket Living
Jonathan Di-Stefano, chief executive, Telford Homes
Harry Downes, managing director, Fizzy Living
Peter Freeman, co-founder, Argent
Simon Gawthorpe, managing director, Urban Splash
Liz Hamson, editor, Property Week (chair)
Kate Ives, development director, Wates residential
Anil Khera, chief executive, Node
James Lidgate, chief executive, Legal & General Homes
Jamie Ratcliff, assistant director policy, programme and services, Greater London Authority
Sophie White, head of infrastructure, PRS and complex projects, HCA
Dan Batterton (DB): He should be promoting good-quality housing for rent. In the US, the normal thing is you rent until you are 40, then settle down and get a white picket fence while your kids go to school. Then 20 years later when they have moved out you sell up and move back into rental accommodation. I can definitely see that approach becoming more prevalent here if we just had some decent stock.
Nick Cuff (NC): We’ve got to the point now where the planning system is asking far too much. As developers we spend so much time negotiating tenure mix and viability with local authorities; it’s too complex and fairly poorly understood by most of the parties involved. The minister should look at introducing a tax to get the state back into doing some proper housebuilding, because I don’t think the private sector alone can deliver the numbers that are forecast. With a tax in place, agencies such as the Homes and Communities Agency (HCA) or Greater London Authority or a local authority could develop some of their own homes, rather than spending so much intellectual and economic energy negotiating site by site with developers.
Jamie Ratcliff (JR): I disagree with Nick. If you look at the amount of receipts local authorities are taking in, they are almost always taking in more than they are spending. One of the key challenges we face, particularly in London, is that there isn’t enough land.
Harry Downes (HD): I would like to see a massive simplification of the planning laws in places where density should be increased. Everyone agrees that we should be densifying town centres, but developers have not got a clue how to get permission for a building of more than 10 storeys in any one of London’s 150 town centres without being turned down on the night by a couple of Nimbys. It happens, and it has happened to us. We need a planning system that is positive towards development rather than against it.
Jon Di-Stefano (JDS): There are skilled construction workers in London and in the rest of the UK that we don’t want to lose because of Brexit. Sharma should be at the forefront of saying that all the other housing strategies that he brings in will be completely pointless if we do not keep this workforce that can actually build things. If everyone goes back to Europe then we have got a problem.
JDS: It’s a precarious balance. We do want Sharma to target things he can actually do, because if he tries to set out his stall too much then he won’t change anything. He needs to break down how he is going to deal with every part of the housing delivery process - where is the land coming from, how it is going to get planning, how much of it is going to be affordable - without concentrating all his energy on any one thing.
Faraz Baber (FB): The development industry has been promised a number of sweeties that could still go through. The minister really needs to see through reforms to the Community Infrastructure Levy as it has been nearly two years since that was drafted and put in front of civil servants. Help to Buy has been a real fillip for the housebuilders and the government should be working on a plan for what happens post 2021 to give us confidence about what happens when that pot of money finishes. Stamp duty also sits on the table as something that Sharma needs to have a dialogue with the industry about, particularly in the middle section of the market. He should also empower the HCA to go from regulator to delivery agent. With Sharma as housing minister and Gavin Barwell sitting in Number 10, we have the right agents in Whitehall to make those things happen.
Sophie White (SW): We have a clear mandate to help diversify the market and increase innovation, both through land and through funds. We want to help all those that can start delivering housing, and that includes small and medium-sized developers. I sometimes get asked why the HCA is supporting a company that is only building five, 10 or 15 units - but if you look at the top five housebuilders in the UK, most of them came from those very simple beginnings.
Simon Gawthorpe (SG): The link between SME developers, public land and offsite construction is really interesting to me. To help attract new entrants to the market, there could be an extra layer of government assistance whereby they could offer land to smaller developers doing offsite construction.
NC: The government has realised that the housing crisis is perhaps more acute than Theresa May had considered when the housing white paper was published. Pocket was recently visited by a government adviser who seemed to be leading down the line that permitted development rules should be vastly expanded, because the government is handicapped in what it can do in legislation terms without a majority in parliament. Personally I think that structural change would be a better solution - but that might not be on offer because of the nature of the political system that we have at the moment.
FB: The housing white paper was a very dry document. It wasn’t particularly strategic in the way it looked at inward investment and the way that could come into the housing market - it just wasn’t ambitious. I think they need to redraw things and be strategic.
Rita Akushie (RA): The big thing that housing associations want to see is certainty around where we can set our rents. This is especially important in light of Grenfell, because a lot of housing associations have responded to the previously set rent cap by tweaking their maintenance costs. The difference between rents increasing in line with the Consumer Price Index (CPI), at CPI +0.5% or at CPI +1%, can have a huge influence on the level of development a housing association can commit to.
JR: The GLA’s draft housing strategy recommended a long-term, inflation-linked settlement for housing association rents. The £1.7bn funding allocations we made in July for housing associations to deliver nearly 50,000 new affordable homes shows that their ambition levels are really high, but in order to get a longer pipeline going into the future they need certainty and they need rents that are linked to inflation.
James Lidgate (JL): There is a weight of money in people’s pensions that want to have an income linked to CPI, so we think there is a real role for pension funds to co-invest in the delivery of affordable housing. But for that to happen, we need clarity on where rents are going to be set and what the treatment of grant funding is going to be. We have been lobbying for that, but the government is busy with other things at the moment - there is an awful lot of investment into what Brexit means.
Alan Collett (AC): If the mayor of London had not made that funding commitment, development carried out by housing associations would have fallen.
The mayor has done something really good and we are delighted we are a partner in that programme, but it only applies to London. Beyond that, the situation is looking very different.
RA: We are trying to diversify the business, so we have set up our BTR arm Fizzy Living and we get involved in joint ventures. All of that is about gaining commercial profits to deliver social housing, which is great when the market works for you but if there is another downturn a significant number of housing associations might have difficulties.
JDS: I hope it won’t have any impact on the quality of social housing, because the quality of new social housing is already good. But I do think there is going to be a big impact on housing associations with the stock they own now and the cost of retrofitting things - I was speaking to one the other day that talked of multiple millions that it was putting aside. It’s going to cost a lot of money and take up a lot of management time in social housing. There is no way we can be arguing for anything light-touch here, but it is probably going to be a difficult landscape for a while as the industry tries to work out what is regarded as OK in terms of building a building.
RA: I think it’s unfortunate that it has been seen as a social housing problem. Social housing providers don’t build to a lower standard: the difference between social housing providers and private developers is we build and hold the assets, so we are there when repairs are due. Social housing has been starved of cash so a lot of associations are trying to come up with asset management strategies at the same time as developing additional dwellings, and that balance is where sometimes they go wrong. Asset management strategies are going to become a bigger part of our agendas where maybe they haven’t been and there probably needs to be a review of that.
Anil Khera (AK): Some of the best development sites in big cities are ex-council-estate sites. Most of these sites do not need cars around them, for example, so there is an argument for knocking them down and building twice the density, and thinking more about placemaking. It’s a radical idea but the land is there, and there is maybe more of a will now when you have residents believing they are in unsafe buildings, which they may not have pre-Grenfell.
JL: People that look after pots of capital, either for institutions or investors, will sit on their hands and wait and see what happens, because Brexit can’t benefit our economy; it can’t benefit the European economy and it can’t benefit the delivery of housing. I fully appreciate that there is a period of negotiation to go through, but the government should still be able to control things like what the rent levels will be on housing association homes in five years’ time.
RA: I think the impact of the potential skills exit from the UK has been felt already. The worst thing is not so much what the Brexit decision was; it is how long the process is taking and the perception, particularly among people from outside the UK, that it is not clear how it is going to end. Those who can are already making decisions about moving and settling somewhere else, and that uncertainty is quite worrying.
Kate Ives (KI): We can pick and choose the work we do as a building contractor and in addition we are now looking for opportunities where we can deploy our direct capital into development projects and use our skills to speed up the pace of delivery. I strongly believe in the developer-contractor model and I would like to see central government trying to incentivise that. A lot of attention has been paid to housing associations and the PRS but the developer-contractor model needs to shine too, because it does have the backbone to deliver development and investment and also construction delivery. It is kind of a one-stop shop.
SG: L&G, Berkeley Homes and Urban Splash are all doing it, but if you drill down to the number of units produced it is still very small. The model can only work at scale, so you need the big orders and the big investment.
It is great that L&G is now involved because it has to be about major players and long-term returns. It is not a quick win but it is an important part of the industry.
JDS: It is important not to see offsite as only being about whole units, because it can also mean building smaller elements such as cladding or bathroom pods. There are lots of ways of doing little bits of offsite that speed up the process.
KI: I think you have to be careful about faddism in that sector, but I do think it is a genuine solution to delivering more housing and Wates is looking at it very, very closely. It will take time to get ourselves into that space and to organise a factory, but we certainly have sites where we are pursuing offsite systems for delivery in 2018.
JL: It is going well, but we have found that you have got to be proactive very early in the process. If developers come to us when they already have planning permission and are close to signing a construction contract, it’s too late - we need to drive efficiencies through design, through the supply chain and through tweaking specifications. It’s no secret that the costs are very difficult to get right: they are not going to get below traditional construction in our opinion, but they are within a few percentage points of traditional construction. Offsite plays to the BTR market and to affordable housing: companies that consider the overall lifecycle costs of housing rather than looking to recycle their capital over the next couple of years. I’m sure that will be where the bulk of the orders come from for our facility.
NC: It plays into the estate regeneration market too. Pocket has done an estate regeneration scheme in modular and there was a massive reduction in all the externalities that come with traditional construction in a dense area. Not just the time, but the noise, the dust, the mess - all of that is completely reduced by going in, using a modular system and getting out quickly.
SG: In theory, it takes Urban Splash two weeks in the factory for a three-storey house and three weeks when it gets on site, but only now, two years in, are we close to getting to that point. It’s still more costly than traditional - I do think it will reverse and go the other way but only through numbers.
SG: It will gradually get quicker and more efficient through the process, but what that needs is a big order, which would ideally be achieved through a link with the public sector. If you go to a private sector partner they will ask about your costs and say they could do it traditionally with someone else more cheaply. It needs to be a brave, long-term collaborative approach to drive the volume.
KI: We should be thinking about those businesses that can start doing a plug-in with the HCA on the investment side, bringing together skills, land and investment. If you can bring those three things together as a developer you’re good to go. The planning system has its challenges, but I think those can be overcome if you go to a local authority as a ready and willing developer and say: “I’m going to actually build.”
JR: At the moment, there are too many small-scale manufacturers that have bespoke ideas and a special way in which their panels fit together that no one else can do. That makes it much more fragile because if that manufacturer fails then your whole system fails. What you need is interchangeability of parts and a standardisation from the manufacturer’s side. It is also key for manufacturers to have transparency about pricing and be willing to spread the cost if a developer makes a long-term commitment.
PF: Nimbyism and planning committees are a huge issue. I’m not blaming Nimbys, because they have every right to feel annoyed about most of what is built that brings no benefit, produces no new amenity, blocks the roads, takes up places in their schools. But once you set up a system that resists change and makes it hard to get planning, if you are a developer who has got 2,000 plots, 18,000 plots or 50,000 plots the most sensible thing is to eke them out slowly, partly to get the best price for them and partly so as not to run out your business model because you do not know where the next sites are coming from. The planning process should not start with the officers identifying the most likely sites, but saying to developers: “Bring me some big ideas forward - bring me some really exciting schemes.” There is nowhere in the planning system that says: “Bring me a good idea.”
NC: The land classification we have in the current system is too binary: we have greenfield and we have brownfield and we don’t really have anything in between. It feels to me that there needs to be more categorisations than that.
RA: I have worked mostly in London and the South East and I would say there are a lot of sites that I would call ‘brown green belt’: it’s got a car wash on it, or it’s in-fill space, or all sorts of things that are not green. I thought that it was a positive that the housing white paper mentioned a potential review of green-belt land.
PF: We need to go back to what the green belt was originally designed for, which was to separate settlements and avoid coalescence. What local authorities should be doing when they transfer land to a developer is maybe dedicating three times as much for farming or a local park. If you could tell local people that this protected and enhanced green areas, you would get a public spirit that was supporting development.
PF: Although towns like Letchworth are now thought of as being a bit twee, I think it is extraordinary that since Milton Keynes started about 50 years ago we have not really developed a large-scale new town. I think there is room for at least 50 new towns of 10,000 homes or more. Plenty of us developers call ourselves placemakers, and how many places do we make? Not many.
KI: If we built new towns we would need to find developers that wanted to deliver them out and be partners in the whole lifecycle process. What you often find are land investors who end up trading on the land value rather than the delivery value. It has to be about the output and what other benefits the community receives out of that.
DB: I don’t think renting is a second-class option; I don’t think it’s something people do while they are waiting to buy. A huge proportion of people make an active choice to rent. L&G provides a product that is aspirational, offering something that people could not have if they owned a home.
HD: It is all about what kind of product we push out into the market: we’ve got to put out enough flats for everyone to make a choice. At Fizzy Living, our residents are young professionals with an average age of 31, they work in London and they want to live near a tube. They see something that has been designed and specified and amenitised for them.
NC: There are 1.6 million people in London who would like to own a home but can’t, and they earn good incomes working in jobs that they love or they are progressing up the career chain in. They want to live a city lifestyle and need to find something that is appropriate for them in a central location. If BTR or micro flats or co-living can offer that as a stepping stone to a home-ownership option, that has got to be a really positive thing for the economy and for those people.
PF: The number of people renting is always portrayed as a social failure, but I think it goes with people settling down later, living as single people and breaking up from relationships. It’s a very flexible way of living.
SW: There is a proportion of people who can’t afford to purchase, but what I am increasingly seeing is that there are people who are moving out of property because of family changes. Outside London we are seeing a real growth in BTR in enterprise areas where industries with international links are basing themselves and staff are coming over for a couple of years. In places like that, well-let, well-managed rental stock is a really convincing piece.
FB: Psychologically, home ownership has always been in the mindset of the UK. I don’t discount that BTR has a place where people may move to another city or are trying to get on to the housing ladder but I do wonder, if I was starting out again, how much I would want to spend in that space. You do want a long-term investment that you can hold and feel, and flip into something better over time.
HD: Five years ago, everyone said the purpose-built PRS was never going to happen because English people don’t like to rent. Now the government has suddenly started saying that PRS can help and the mayor is saying that too. I don’t know why they weren’t thinking it five or even 20 years ago.
DB: BTR is genuine new supply: it’s new cash, new equity coming in. If the housing market cools, that’s not going to stop our delivery or slow us down. We can add a balance to a sector that has historically been quite volatile.
JDS: I’m sure the market is there. Telford Homes is going into it because we can build more and grow a lot quicker, and we don’t need as much money because someone else is providing the funding. It is getting there in London, but I think it can work across the country.
JR: There is a big difference between a compact, well-designed, high-quality flat of 37 sq m that meets our design standards, which is fine, and something that is a lot smaller.
AK: Micro flats are part of the answer. A lot of councillors are totally against it because they just think people shouldn’t live this way, but there is a need among 20-somethings starting their first job or apprenticeship. It is really key-worker housing, so there is need for a planning use that is a bit more accommodating. There is also a lot of low-density housing in London, whereas people are building 90-storey condo towers in Toronto and people aren’t that worried about it. There is a psychology that tower blocks are for council estates so it is a bit of a social status thing - if you have new kit, I think people would get over that stigma.
This event was chaired by Property Week’s editor Liz Hamson and took place on 13 September 2017 at RESI Conference, Celtic Manor, Newport.
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