UK Property - Troubled housebuilding industry ‘changing fundamentally’, according to major report

The crisis in the housebuilding industry could result in significant changes to the way new homes are financed, built and planned in Britain, according to a major new report by Knight Frank.

The Future of Residential Development, a 55-page investigation compiled following interviews with over 50 key figures in development, planning, economics and academia, is the first attempt to provide a comprehensive picture of how the credit crunch and the recession are changing the residential development sector.

It argues that a major ‘land transfer’ is underway that could change the whole nature of the industry and the way it does business.

In response to their financial difficulties, many of the volume builders have put large amounts of their land banks on the market. The buyers are not necessarily companies associated with residential development. Sovereign wealth funds, speculative investors and wealthy individuals are all very visible.

Jon Neale, head of development research at Knight Frank, said: “This transfer of land, much of which is earmarked for development as part of the government’s drive to deliver millions of new homes, could have real implications for the industry.

“Land values have fallen by as much as 70% in some areas, although 30%-50% falls are more typical. It seems unlikely that they will quickly bounce back to peak levels. Many new investors may choose to hold onto their purchases, waiting for better returns. This could block development and further reduce housing supply.

“Others could choose to develop the land themselves in phases, creating value by providing a high-quality urban extension or new settlement, using housebuilders as contractors or planning and marketing consultants rather than selling plots or engaging them as partners.

“As they may have to take a long-term view to make a reasonable return, there may be more of an emphasis on quality than in recent years. The current spike of interest in renting may also mean that investors or even developers hold newly built stock to let out, particularly as yields are likely to remain high in the medium term.”

The report also highlights that the public sector is taking an increasing role in the land market. With government agencies and housing associations representing a large chunk of purchasers, they are almost as active as private investors.

Neale added: “It is highly likely that many larger sites could come into public ownership over the next few years, particularly as land values are so low.

“There is an opportunity here for government agencies to provide them with infrastructure, preparing sties for development when the market returns to strength. Again, though, it is likely that the public sector will exert greater control over the build-out by retaining a stake in the scheme.

“Consequently, it is entirely possible that traditional volume housebuilders could play a smaller role in the delivery of homes in the future.”

Not all housebuilders are in financial stress, however. The report suggests that the more solvent companies are already seeking more conservative opportunities, looking for prime Greenfield sites to build out as traditional family homes at lower densities. As a result, local and central Government will be under pressure to release more farmland for development.

Urban regeneration and large-scale new community development will probably be carried out by joint ventures, perhaps featuring public-private consortia or long-term investors, and may require more public funds. A new regeneration model may be required, one that focuses on developing medium-density town houses and larger, more liveable flats. New forms of tenure, such as rent-to-buy, may be needed to help kick-start schemes.

Neale concludes: “It is wrong to be too pessimistic about the current situation. Indeed, it offers a new opportunity to reshape the industry and the policies that guide it to better cater for Britain’s housing needs.”

Courtesy: Knight Frank Residential Research

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