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Key Note Housebuilding Report 2009

publication date: May 5, 2009
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Key Note Market Report - our experts give their view

As government spending commitments to the housing sector and assistance for the economy in general may only filter through slowly, the housebuilding market may still take time to recover. In its new Market Report – Housebuilding – market intelligence provider Key Note does not anticipate any significant improvement in overall performance in the housing market before 2011. The Construction Products Association (CPA) also supports this view, stressing the importance of an improvement in credit availability to safeguard recovery.

Despite the worrying state of new housing orders in the private sector, this appears to be more as a result of a lack of liquidity in the financial markets than a lack of demand from consumers. Government statistics suggest that private housing orders in the three months ending September 2008 fell by 33 per cent compared with the previous quarter, and by 53 per cent compared with the same quarter year on year. 

The UK’s growing population will ensure both sustained demand for housing in the years to come and affordability, as well as land supply and planning issues; therefore it will become paramount in assisting growth in this sector. Any upturn in the number of private-sector housing starts and completions is still heavily dependent upon the recovery in housing finance to help both housebuilders and consumers.  

However, public-sector housing starts present a more optimistic picture, given Government funding for the sector, although they are still dependent upon private housebuilders to actually build them. Even so, public housing and housing association (HA) orders in the three months ending September 2008 fell by only four per cent in comparison with the previous quarter and were unchanged when compared year on year.

Despite all the initiatives designed to boost the industry, the housebuilding market may still take time to recover, says Key Note, with consumer optimism and household disposable income picking up only slowly and housebuilders gradually returning to higher staffing levels. The market for housing repair, maintenance and improvement (RM&I) work is also expected to slow in 2009. The public-sector programme of renovation will wind down over the period, as most accommodation is estimated to reach an acceptable standard by 2010.

The growing level of legislation aimed at making homes more energy efficient and sustainable is likely to continue to be a key area over the coming years, though it may result in increased building costs. As a result, new product development is likely to centre upon reducing costs, while ensuring that energy improvements are made. Over the next decade or so, the population of Great Britain is projected to increase significantly, while household size will diminish. This suggests that a growing number of smaller households are creating ongoing demand for housing.

If British builders aren’t all bald, they should be. Events of the last year have certainly given them cause for tearing their hair out. Given the Olympian task by the Government of providing 240,000 new homes a year by 2016 to meet changing demographics, the hurdles to be jumped to achieve that ambitious goal have grown in height and number. 
However, it is the cataclysmic events of the past 18 months which have made the target even more unattainable. That is spelled out in forensic detail in the Key Note report, but not everyone agrees.

“Patent nonsense!” says Trevor Abrahamson of Glentree Estates in North London. “It is true that Q4 of last year was terrible, people were frozen in the headlights, but we have moved on from there. We are in the recovery phase.
“We have the largest number of new developments for sale in North London and we are seeing serious people coming to open days and buying. Greed is gradually taking over from fear, people don’t want to have their wealth in cash.
“We are very close to the bottom of the market, money is cheap and people believe there is no more serious bad news to come. It’s no ‘hallelujah’ moment. But there is no more distress stuff for sale.” 

Builders block
Even before the banking collapse, developers were already struggling to meet demand. Following Government advice that the number of single person households was increasing, they were were then blamed for building too many flats and not enough family homes, leaving a glut of half empty city blocks. They have wrestled with a bureaucratic planning permission system, a snowstorm of EU-led new building regulations and the drop in the value of their landbanks.

Says Steve Turner, spokesman for the Home Builders Federation: “The impact of the costs of the regulatory requirements was making sites non viable even before the current downturn. We need to find ways of paying for the growing list of social requirements being set out by central and local government. Simply expecting developers to pay for them out of increasing land values and property prices, as has been the case in recent years, is simply not an option, as the costs will just makes sites too costly to develop and result in a dramatic reduction in output. The cash cow that land prices became is dead.”

The retrenchment of the banks and their refusal to lend to all but the most platinum rated customers – and therefore most first time buyers – had an immediate knock-on effect on the share prices of major housebuilders. Many had to write down the value of their land banks and slash their workforces last year. The gloomiest predictions suggested the loss in value of landbanks could reach £13bn, potentially cancelling out the profits of the top six house builders over the past 10 years.

It’s true, at the end of last year, shares in housebuilders like Barratt had dropped dramatically. It was a close-run thing whether some biggest names in British housebuilding would disappear in a puff of brick dust. Since then, Barratt’s shares price has  seen a strong recovery and bold investors are back and buying.

And what a difference a Q makes. Even the Fully Furnished Group, which provides furnishings to developers for show homes and furnishing packs for individual properties, has just reported a 10% increase in income for Q1 of 2009, compared to the same period last year.

Growing optimism
Builders Crest Nicholson are also optimistic there will be improvement before 2011. Stephen Stone, Chief Executive of Crest Nicholson says, “It is encouraging to note that some lenders, albeit cautiously, are beginning to offer higher loan-to-value deals than was previously the case. This indicates a belief that house price falls are easing, and certainly I believe that we will start to see the market picking up again in 2010. The fall in interest rates appears to have done much to stimulate consumer demand.

“A significant proportion of housing supply is set to be delivered through large scale regeneration schemes, but the problem is that these require major investment in local and regional infrastructure. As a result, the delivery of smaller scale schemes will be equally important in terms of delivering the desired growth in housing supply. We need to concentrate on building the homes that people need, in the locations that people genuinely want to live in.
“Planning policies to date have historically been concerned with increasing density, but we need to commit to delivering an increased supply of larger three and four bedroom homes alongside apartments.”

The Key Note report concedes the outlook is likely to become slightly rosier from next year, but adds much may depend on which housebuilders actually survive into 2010. On the plus side, it notes:

The UK housing market tends to be cyclical, with sustained consumer demand eventually leading to an upturn. This means that it is likely to pick up over the next two to three years, despite the current harsh economic conditions.
Home ownership in the UK is particularly strong (at 70 per cent) and there is, therefore, likely to be long-term demand for housing repair, maintenance and improvement (RM&I), as consumers continue to invest in their properties.

Despite drops in house prices in 2008, investment in property still appears to offer good long-term prospects.
The housing sector has been recognised for its contribution to the economy and the role that it plays in creating affordable housing for an increasing population. The Government is, therefore, focused on assisting housebuilders.

The last point has been greeted with hollow laughter from the property industry. For a start, there has been a rapid turnover of Housing Ministers, three in as many years, each waving a raft of ‘initiatives’ which have had to be absorbed by the industry 

The Connells Estate agency Group, with 460 branches, is one of the UK’s biggest sellers of new homes, selling for most of the top 20 house builders in the UK.
“It makes me guffaw when I read about the Government expecting 240,000 new homes a year,” says Stephen Shipperley, Group Chairman. “Historically, there have never been more than 200,000 built in any year. The three main problems with that are the planning system, availability of land and not enough skills and labour.”

Connells has noticed recovery signs in the market, including a rise in parents buying starter homes for their children.
“Things have perked up although there is still a lack of mortgage finance,” says Shipperley. “Before Christmas was a torrid time for everyone. Last year was probably the worst I’ve known in 31 years in the property business. It’s estimated 3,000 estate agency branches closed, out of 14,000, but I think that was a bit of natural weeding out and good thing for the market. 

"This year, I think everyone has been caught slightly, and pleasantly, by surprise. Sales agreed are 50 per cent up on Q4 last year, admittedly from a low base. It is a move in the right direction and it is starting at the bottom of the market. Many people may have had money in the bank, just earning one per cent interest, or have been frightened to death by the Stock Market and pension funds and can now buy at a 20 per cent discount. Spring has definitely sprung. Property is back on the agenda as an investment.”

Jon Neale, head of Development Research at Knight Frank, agrees the chances of house builders reaching the Government targets are remote.

“The rate of new homes supply has dropped significantly, with only 60,000 new homes started this year. It is the lowest figure since the Second World War,” he says. “New build stock is decreasing and by 2011 there will be hardly anything around, which will affect prices. A supply shortage could stop prices falling further. In many cases, the market has bottomed out for new build property.

“The mortgage market is still a massive problem, as are down-valuations. Possibly worse, unemployment is starting to bite, making people wary of taking on a long-term financial commitment. What has been a success is shared equity, including the HomeBuy Direct scheme which has been well taken up.”
Although low consumer confidence and increasing unemployment are still putting a brake on sales, the Halifax’s housing economist Martin Ellis says, “There has been a marked improvement in housing affordability across the UK over the past 18 months. Housing is at its most affordable for almost seven years.”

Ben Tett is Development Manager at estate agency Kinleigh Folkard & Hayward, which covers most of London. A lot of the gloom and doom predictions lingering like the ghost of Christmas past have been superseded by better news, he says.

“Sales are being agreed, finance is more readily available and there is the feeling we have reached the bottom of the market. Anyone with savings who has kept them in the bank might as well have stuck them under the bed. Compared to the interest rates, property is still seen as a good bet. However, we’re not cartwheeling down the streets just yet.”

Another problem for developers, says Tett, is the requirement to build social housing as a pay-off for putting up private units. Where a developer could put in 14 units before having to include social units, this has been sliced to nine or 10 in some London boroughs, even though the land is available  to put in more, making it uneconomical for the builder.
To add to their headaches is the Government’s commitment to zero-rated carbon emission new homes by 2016. These targets, says the Key Note report, are expected to increase build costs at a time when house prices have fallen. It has been suggested the highest level could add up to £36,000 to the cost of a home.

“That target is farcical,” says Ben Tett. “The extra cost to the developer would wipe him out, unless he could pass it on to the buyer. The Government has produced conflicting targets: zero carbon rating, plus providing thousands of extra homes per year. If you showed a buyer a house and said this is is good for the environment but costs an extra £36,000, but you have the identical one next door which isn’t as good, 99 per cent would say I’ll have the not so good one, thanks. When it comes to cost, there’s a level of priorities.

“Increasingly, it’s the banks in charge of what is sold and how much for. In the new build sector, asking prices are irrelevant, it is the RICS value which counts. The new build premium of 10 per cent has gone to zero. Valuers are being told to value them the same as they would a good condition pre-owned property.”

Investors cash in
Says Paul Winstanley, of Allsops Residential and Development team: “With house prices having fallen, investors with cash or with access to some limited gearing, have the opportunity to engage in a competitive long term investment due to the solid foundations of the UK housing market. Current residential values make it possible to buy at desirable yield levels as shown by our recent auction results – and the number of sales indicates investors are responding positively to this. Gross yields from residential property have risen significantly above LIBOR borrowing rates – now typically offering potential returns of seven to eight per cent. This has not been seen over the last 10 years. For the investor, there is the alluring prospect of both an immediate positive cashflow return and, assuming prices return to peak 2007 levels by the end of 2015, solid capital growth prospects on today’s price.

“Housing fundamentals in the UK remain sound. Demand for property is ongoing – whether for sale or rent – as housing represents a need and not just a want for the population.”

This is echoed by the findings of a survey by YouGov, commissioned by the New Homes Marketing Board. The vast majority of Britons still want to invest in homes, in spite of the economic situation.

Says David Pretty CBE, Chairman of the NHMB, “Our national belief in the benefits of home ownership seems almost unshakeable, which is quite remarkable given the current economic situation and all the doom and gloom.
“Even before the current recession, national housing production was well below previous decades. It is now the lowest in living memory. By 2010, pent-up demand for homes could be well over a million. There is a real possibility that property prices, which have fallen 15 per cent and more, could rise back to 2007 levels within five years.”

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