Tuesday, 13 March 2012

Who Will Build These Homes?

Her Majesty’s Loyal Opposition of 2010 which produced ‘Open Source Planning’ - a relatively anti-property development policy prescription - has turned into a very pro-development Government. It’s all about growth. Put simply, there are only a few things Government can actually do to help the private sector lead our growth out of the recession, and creating the right policy environment for lots of property development is one of them.

If you want growth, you need investment. And if you want investment, you need development to generate those interesting returns that make investors invest. And the real benefit of all this for a Government is jobs.

So far, so good. But to get voted back into office, you need to be delivering increased wealth for normal people not just the business and investment community, particularly after you have had to squeeze them so hard for the last few years to pay down that deficit. And this, children, is through home ownership as demonstrated by Mrs Thatch in the 1980s.

For all the silly Government schemes of the Blair/Brown years which hosed lots of taxpayers’ cash around for little significant return, Mrs Thatch actually delivered social mobility through Right to Buy. Millions moved from defining themselves as ‘working class’ to ‘middle class’ during Mrs Thatch’s era simply due to home ownership and the wealth it generated for them. (Which is why I’ve always been so perplexed why Lefties (a) hated Right to Buy and (b) saw no redeeming features in Thatcherism).

So, increased home ownership is good. And of course more residential development also delivers more affordable housing which gets people off local authorities’ waiting lists which is better for the individuals and cheaper for the taxpayer. The Government has embraced this and has brought forward several eye-catching policies:

Right to Buy - A massive expansion of the scheme which Blair/Brown had tried to water down as much as they could for frankly ideological reasons.

Build Now, Pay Later - By letting developers plan, build and sell residential projects on excess public land marked for disposal and not demanding payment upfront but only when the developer has actually sold his newly developed houses seriously excites a development industry which is struggling to get banks to fund its development schemes. And it will seriously kick start the delivery of new homes and affordable housing.

NewBuy - Announced today, this scheme essentially provides 95% mortgages for first time buyers who are buying a newly built home. The developer puts an additional 3.5% of the purchase price (essentially roughly what they currently spend on incentives - mortgage fees, new carpets, new curtains etc) into a fund managed by the mortgage company with Government underwriting another 5.5%. This gives a serious cushion for any mortgage company should any future crash happen, thus enticing them to lend.

So with all this going on, everyone is getting into residential development. I have lost touch of just how many of my clients which previously have not been residential developers but which are now getting in on the act. And we’ve had a rash of private equity investors and developers buying up residential development companies - Macqarie, Carlyle, Development Securities. We even have a new entrant in the form of Skanska, which has residential experience in Scandinavia but never before in the UK.

And what have we seen from the media? Wild, misinformed, almost hysterical opposition, take this from Fraser Nelson at The Speccie as a typical example. Read the comments after the post. Some people put Nelson bang to rights on his nonsense.

But here’s the real problem: our residential development industry is now 50% of the size it was in 2007. So who is going to actually build all these houses? These smaller, leaner resi developers absolutely do not want an unsustainable boom. They are in fact not crazily expanding their businesses like they did previously. They are instead all paying large dividends to their shareholders who have stuck with them in recent difficult times. Persimmon, which was selling around 24,000 new homes a year at the peak, is now selling around 15,000 a year and is happy at this level. The new entrant, Skanska, is only aiming for 1000 a year; small beer.

The Government might be going to be rather frustrated sometime soon.

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