Build-to-rent to cement the future
Estates Gazette
The residential development industry needs to re-think its strategy for future growth if it is to extend its profitability in the years ahead. The policy of targeting equity rich households through the development of family housing in southern England has certainly paid off. The foundations for higher profits were laid in the write-downs and cheap land deals of 2008/2009 and accelerated by above average growth in new build house prices over the last three years. The question is whether this strategy is sustainable in the long run.
While developers have headed south over recent years the income required to get on the property ladder through outright ownership has increased. Nowhere is this more acute than in the south of England where, despite falling mortgage rates, the income needed to buy an average 2/3 bed home in the south east is currently £52,000 and a staggering £85,000 in London. Nationally the average income needed to buy a home outright is £44,000. As a consequence in many parts of southern England fewer than 25% of households are able to buy an average priced home.
With little prospect of a sustained recovery in housing market activity or mortgage availability, developers need to consider strategies - aimed at both consumers and corporates - to widen the pool of demand. As affordability pressures put a squeeze on sales rates for private housing, so developers need to look to more affordable – intermediate - housing aimed at those unable to buy a home outright and where forward `bulk` sales to corporate, long term investors are more achievable.
The policy environment is supportive of this change. The recently published report for the government by Sir Adrian Montague recognised the need to review section 106 and the mix of housing on stalled or unviable sites as well as seeking greater development of rented homes.
The challenge with intermediate and affordable housing tenures is that they attract a lower sales value than private housing. Market rented and shared ownership tenures typically deliver between 70% and 80% of open market value; affordable housing, below 50% (before the addition of further capital subsidy, if available). Changing the mix of tenures on a scheme can deliver improved site viability but often at the expense of lower value affordable housing. A sticking point for local authorities where unaffordable and expensive, housing markets tend to have the largest levels of housing need.
This move also requires investors willing to commit to buying housing upfront. Traditionally this has been the housing association sector. While larger housing associations have an appetite to expand their portfolios, the market requires new investors to add to the pool of corporate demand.
The pool of demand for intermediate housing is large and is currently being met primarily by buy-to- let landlords through an expansion in rental supply. More rented housing is part of the solution but only in markets where there is a viable rental market. Shared ownership tenures will also play their part. Build to rent has not been on the house building agenda but with no end in sight to the problems of mortgage availability, the industry needs to consider new strategies towards maintaining output and profitability in the coming years.
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