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How can housebuilding get back on track post-coronavirus?
Once some degree of normality returns, what measures might be needed to stimulate the market? Helen Collins assesses the options
At present the focus of housing providers is entirely on supporting their tenants and other customers, staff, contractors and supply chain through the impact of COVID-19.
As a long-standing housing professional, I am not surprised by the speed and overall effectiveness of the response by housing associations, local authorities, ALMOs and others. It makes me proud to be a part of #ukhousing.
Although these are very challenging times, as Boris Johnson and our other political leaders have stressed, we will get through this.
The government has taken unprecedented steps to support the economy and to protect the public. Undoubtedly the impact of the suspension of the housing market will be far-reaching.
Our latest research indicates a short-term reduction in house prices of between 5% and 10%, and a significant fall in transaction volumes.
However, based on Oxford Economics post-recession recovery forecasts, the impact could be shorter lived than the early 1990s recession and the global financial crisis of 2008. Yet, as new build residential construction comprehensively shuts down, it is obvious there will be a hiatus in new housing supply of all tenures.
The duration of this remains the key question. UK PLC will need construction and housebuilding up and running as soon as possible – so what interventions might be needed to stimulate a swift return?
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The vast majority of sites are now shut – right across the residential development sector. Volume house builders are open for sale via online viewings, but construction has halted and labour and supply chains are on pause. Build-to-rent schemes are on pause.
According to the National Housing Federation, housing associations in England completed more than 40,000 new homes in the year to March 2019.
This was a record number, with around 50% of this total being Section 106 and 50% being grant funded. However, as we progressed through 2019 we saw a reduction in cross-subsidy from shared ownership and open market sale, led by the London market, as sales came under pressure from market cyclicality and Brexit worries.
Local authorities have increased their output in recent years, and much-needed momentum is building, albeit from a modest base.
Development teams are being diverted to support frontline services, at a time when the role of local housing companies and the human resource available to support housebuilding momentum is important. So, as housing associations and local authorities stop development on sites, we have seen continued activity on a selective basis on land and property deals.
“While there will be some potential for bulk buys of unsold homes by housing associations or other investors, this is unlikely to be on the scale we saw in 2008”
But very few are committing to new contracts, as organisations preserve cash until the market recovers.
Many housing associations are stress-testing business plans to assess the impact of no first tranche shared ownership or open market sales income for the duration of 2020/21.
Most will be able to withstand this, with savings arising from delays to new construction and delays to planned maintenance programmes helping to offset the loss of sales receipts.
In 2008 the financial crisis caused high street banks to shut down retail and commercial lending. The entire housebuilding industry came to a grinding halt. Housing associations were given additional grant to convert unsold shared ownership homes to rent, and new grant to buy unsold developer stock converting open market sale homes to affordable tenures. House builders large and small benefited from Kickstart and Get Britain Building funding initiatives to get stalled sites moving again.
Despite this, SME builders were hit very hard indeed – according to the Home Builders Federation, in the period 2007 to 2009 a third of SMEs stopped building homes. Unlike today, the remedy was purely financial – there was no public health challenge keeping workers away from sites.
Fast forward to today and, although they have almost all downed tools, volume builders have low levels of debt and substantial cash reserves, so are better placed to ride out the downturn than in 2008.
Although the scale of market-related development is greater, housing association finance is generally on a firm footing. This is due to the effectiveness of the evolution of co-regulation, but also to preparations for Brexit to ensure liquidity in case of short-term economic problems.
We don’t expect to see significant levels of overhanging stock in the immediate future. While there will be some potential for bulk buys of unsold homes by housing associations or other investors, this is unlikely to be on the scale we saw in 2008. However, if there is a prolonged freeze then volume builders may well need help to restart sites.
“A large-scale, grant-backed ‘Get Britain Building’ style programme could enable housing associations and local authorities to buy standing and shovel-ready stock from SMEs, volume builders and landowners”
Once again it is SME builders and developers facing cash flow challenges. Many carry little cash reserves, yet play an important part in the industry and will need help to get through.
As the public health situation eases, to support a quick return to building, a range of interventions may be needed during the next few months.
The housebuilding industry as a whole could make a huge contribution to restarting the economy – and the affordable sector has a critical role to play.
As Homes England reaches out across the industry to listen to the needs of its partners, what are some of the options available?
- Grant: with the cross-subsidy model on ice, and mortgage lending and consumer confidence likely to be impacted for some time, the market for housing for sale of all tenures will remain subdued and affordable housing provider boards will be cautious about mixed-tenure development. At the same time, there is already huge pent-up demand for social and truly affordable housing for rent and this will increase. Providing top-up grant to convert homes planned for shared ownership to be built for rent – perhaps with a right to convert to shared ownership later – could help underpin board confidence to approve new schemes. A large-scale, grant-backed ‘Get Britain Building’ style programme could enable housing associations and local authorities to buy standing and shovel-ready stock from SMEs, volume builders and landowners to provide cash flow and guaranteed forward sales to get sites and the supply chain moving again, while the economy recovers.
- Debt and equity: SMEs would benefit from a recapitalisation debt fund combined with equity. Perhaps in the form of Homes England/Greater London Authority (GLA) buying live and pipeline sites direct – or by grant-funding housing associations and local authorities to do so.
- Land and infrastructure: Homes England and the GLA may need to step in to buy stalled sites, combining funding and resources to continue land, infrastructure works and planning to get sites moving again. If government agencies were to act as master developer, stalled sites could be used to support SME development.
- Planning: local authority planners will need to be flexible on different types of affordable tenure, beyond prescriptive policies on social rent versus intermediate products. It would also be beneficial if a strong planning judgement was taken on affordable housing as a public benefit, against much-reduced Section 106 obligations, to improve viability.
- Help to Buy: in addition to bulk purchase deals with housing associations, local authorities and build-to-rent investors, volume builders may require further support to rapidly reopen sites post-coronavirus. This could include extending Help to Buy and underpinning mortgage availability – perhaps through a government-backed mortgage lender to get the market moving again quickly.
To ensure the supply chain can get back to work, there will need to be an effective and widescale COVID-19 testing regime.
The road to recovery from the present hiatus will be tough. But with the right information and targeted support, the housing sector can play a key role in helping Britain bounce back.
Helen Collins, head of department, Savills Affordable Housing Consultancy
