Why Are UK Homes Smaller than the Rest of Europe?

Several historical factors have shrunk the size of English residences over the past 100 years. That may not be a good thing, and homebuyers clearly want more.

With a growing population, the UK is squeezed for housing space. But a research report for the Royal Institute of British Architects helps us understand how much that truly is the case, given the relatively small size of homes being built in the 21st century.

The report, “The Way We Live Now: What People Need and Expect from Their Homes” (2012; Ipsos MORI) describes a common yearning for space in one’s living quarters. Developers, architects, homebuilders and those participating in UK land investment funds take note: large main living areas for socialising, large windows for natural light, and more space dedicated to storage and to accommodate commonplace technologies are what people want.

But in reality, those are just the things Britons don’t have. Our homes, particularly those built after the War, are noticeably smaller than those that were built 100 years ago. And our average size homes, at 76 square metres, are smaller than in Ireland (87.7 square metres), Netherlands (115.5 square metres) and Denmark (137 square metres). Of note, the Netherlands is twice as densely populated as is England.

It would be easy to castigate developers for seeking a higher return on investment when building smaller homes - after all, constructing 40 flats on a hectare pales to being able to sell 50 residences on the same amount of land. But before you blame the strategic land partnerships or social housing architects who drive many developments, one needs to take a step back toward understanding the problem, its causes and its implications. To wit:

How small are the homes in Britain? - A survey in 2009 conducted on behalf of the Commission for Architecture and the Built Environment (CABE) found that more than half (58 per cent) of occupants of new homes said there is not enough space to accommodate their furniture. Even more (69 per cent) said they do not have enough room for all their possessions. Supporting that point, there are more than 800 self-storage facilities in Britain serving 250,000 customers who rent 20- to 50-square-foot lock-up storage spaces that can cost as much as £100 per month in London; bigger closets and rooms would be more convenient and cut out that expense altogether.

Why are English homes shrinking? - According to a 2012 article in The Guardian, it may be due to a 1961 Government committee that developed what is called the Parker Morris standards for council housing. This took into account furniture of the day, as well as common household activities, to establish the minimum standards for floor space of homes (accounting for households of various sizes). The odd thing is that private and social home builders took these minimums and treated them almost as a standard; in the 54 years since, appliances have grown and multiplied, while the need to store more has risen as well.

What are the implications of tiny homes? - An American academic, the director of design of human health at Boston Architectural College, cautions that small spaces can become the source of stress that can lead to domestic violence and substance abuse. Another professor in New York, whose specialty is environmental psychology, claims that in her research children in crowded apartments, which tend to be in low-income circumstances, have a tendency to be withdrawn and to have trouble studying.

Of course in house-poor England and Wales, overcrowding is the norm as adult children continue to live with their parents. Developers and homebuilders are increasing the number of residences being built, and government schemes such as Help to Buy are enabling more people to get on the property ladder. The RIBA survey found that many will buy a smaller home because it is all that is affordable, but they hope to move up as soon as their economic circumstances allow.

These are the key reasons investors are drawn to the housing sector, where they might work with strategic land companies, homebuilders or real estate investment trusts (REITs). But every investor should speak with an independent financial advisor to discuss all options.

What Makes Development on 9 Per Cent of UK Land a Set Point?

Advocates for greenbelts and open lands find Government proposals to build outward unsettling. But the housing shortage for a growing population may require it.

Members of a national organisation that campaigns for the protection of countryside, the Campaign to Protect Rural England (CPRE), heckled then-UK Planning Minister Nick Boles when he spoke at their annual meeting in June 2013. He proposed that the 9 per cent of England that has been built upon should be increased to 12 per cent. This proposition proved to be a lightening rod, bringing about strong opposition from the CPRE and other aligned organisations.

But is it such a terrible idea? Can open lands be forever protected as sacrosanct? The UK population grew by 7 per cent in the decade measured by Census 2011, a trend that shows no sign of abating. Homebuilders cite a plethora of reasons why they build only about half as much as is needed, but property funds eagerly seek places to invest and build. It is the economics of scarce land that constitutes a large part of the equation.

Toward those interrupting him as he spoke, Minister Boles lashed out by saying that rural villages would “become fossilised” if land development were blocked in certain areas. Indeed he makes an important point, as the number of individuals engaged in agricultural work has diminished in recent decades, due largely to increased efficiencies in farming. If new (non-agricultural) employers cannot find a population of workers, they simply will not locate their operations where the population is scarce.

To be clear, the housing shortage in the UK is so critical that the following are now points of deep concern:

• The laws of supply and demand seem to be hard at work - much to the disadvantage of the homebuyer. The Institute of Economic Affairs (IEA) reports that, in nominal terms, “house prices in the UK have increased by a factor of nearly forty over the last forty years. Rent levels have followed suit.”

• Social housing, which once numbered 5.5 million units in 1981, now is reduced to 3.8 million. On the waiting list are 1.75 million households. People without dependent children are excluded from this list altogether. This further adds to the price pressure in market-rate housing.

Such discussions almost always prove to be contentious. And data from one study to the next sometimes provide widely different opinions on such matters.

One misperception is that the National Planning Policy Framework (NPPF) tilts land use toward development on greenbelts and the official Areas of Outstanding Natural Beauty (officially designated countryside lands deemed to have significant aesthetic and environmental value, so determined by the UK Government by way of Natural England). To the contrary, the IEA observes that the NPPF advocates for residential development on open (raw) lands outside of the greenbelt and Areas of Outstanding Natural Beauty.

The CPRE organisation counters that more than 400,000 brownfield sites already have planning permission and should be built upon first before green lands are developed (buried in that statistic is how many of those sites have industrial waste residue that needs remediation, an additional cost added to an already expensive housing equation).

The Institute of Economic Affairs singles out the blame for the housing crisis. According to its report, “Abundance of Land, Shortage of Housing” (IEA, April 2012), “Planning restrictions are a key determinant of housing costs.” The report advocates for a liberalisation of the land use planning system as a means to address the housing affordability crisis, citing a number of studies conducted in the UK, elsewhere in Europe and in the United States.

The battle will undoubtedly wage on for some time to come. But to be clear, institutional and private investors (often, those interested in a UK joint venture land investment opportunity do so through alternative investment funds) are increasingly interested in raw land as an investment, seeking planning changes that enable them to add to the housing stock on otherwise non-productive acreage. When those planning changes are achieved, the process is effective. But before an investor elects to participate in a land-to-houses scheme, they should consult with a qualified financial advisor who can help weigh the nature of the investment against other savings strategies.

To What Degree are Businesses and People Leaving London - and Why?

The exodus of younger, entrepreneurial Brits to other cities is measurable and noticeable. And who can blame them? Great jobs and better housing await them.

Many people were surprised to hear in late 2014 that over the previous year 60,000 Londoners left that city to move elsewhere in the UK. Fine, one might think, that helps solve the housing shortage, right?

“Solve” is far from it. In fact, immigration from outside the UK makes up the difference quite handily such that the city’s population is expected to grow from the present 7.95 million to 10 million people by the year 2030 - which will require the construction of a half-million more homes. Instead, this exodus from London to places such as Birmingham, Bristol, Manchester, Nottingham, Southampton and Oxford is driven in part by the lack of housing.

Which gives those who invest through managers of real asset funds much to cheer about. These are the private drivers of housing needed in areas of economic growth. Which may well be what’s happening in places of voluntary exile. Within that large number, 60,000 people, the Office of National Statistics shows a smaller but probably more impactful figure: 22,000. That’s the net outflow of people in their thirties on the National Health Service registers, which is likely an undercount.

The reason that this is the more meaningful number is two-fold. One, that people in this age bracket tend to have young families and as such they illustrate how hard it is to raise a family in London. With the cost of housing so high they lack the funds to manage getting on the property ladder at all or to do so means a significant compromise to their expectations for the size and location of the homes they want. One couple told The Guardian in December that for the same money they were spending to rent a 1.5 bedroom apartment in Wimbledon Village they could buy a five-bedroom house in Kings Norton, near the Birmingham city centre.

But second, this is the age when many people start businesses. If they are starting them in Birmingham, it means they’ll likely remain established there. A few will grow to be significant employers - further promoting migration to what once were considered second-choice cities. Their funds and assets will grow here; in fact, cities such as Birmingham have been receiving young entrepreneurs for several years already, particularly after the financial crisis of 2008.

As one might expect, many of these entrepreneurs are in the tech sector. Among the 6,000 technology companies based here are those in the computer gaming sector that comprise a full 20 per cent of such companies in Britain. Online fashion retailer Asos established a key development office in Birmingham in 2013 because company officials felt confident they could recruit talent there.

Global corporations are looking outside of London as well. Deutsche Bank established an office in 2010 in Birmingham with 50 employees. They’ve grown to 2,000 employees in just five years.

This growth, particularly because it involves young families, does not go unnoticed by UK property fund managers. Their investments in land, building and commercial properties help these older, non-London cities to reinvent themselves. As many of these émigrés arrive with good salaries and for the purpose of bigger homes, the market for new and better houses is strong.

Investors always like growth regions for obvious reasons. But blindly investing in land or property is highly inadvisable. Speak first with an independent financial advisor to learn how and where to find the types of asset growth that fit your objectives.

The Purpose and Implementation of the Community Infrastructure Levy

The increased burden on infrastructure from new developments is real and should be built into development costs. But is the CIL the way to do it?

The Community Infrastructure Levy (CIL) is a product of the UK Planning Act 2008, enforced since 2010, as a means of making developers pay for the increased burden on infrastructure that comes with new homes and businesses. It is an outgrowth of earlier recommendations in 2003 from economist Kate Barker, who felt that planning gains that went to developers should be partially channelled to overburdened infrastructure features (roads, schools, utilities, etc.) and to increase the stock of social housing.

Private investors involved in land site assembly of course need to take this into consideration. Infrastructure will make the properties they develop more valuable – but only if funds from the CIL are put to use in ways that materially affect the new developments. Evidence suggests this does not always happen that way.

In its most basic form, the CIL is charged on any building that has some degree of human occupancy (i.e., not parking or warehousing) including residential, commercial and retail space. Only buildings adding or constructing anew 100 square metres or more of floor space (gross internal area) on or after 6 April 2013 are subject to the levy. Changes of (existing) building uses are not liable, nor are structures that are not actually buildings (such as warehouses or wind turbines). Social housing development and buildings owned by charities are exempt as well.

Implementation of CIL has of course met some criticisms, many of which make a legitimate point. Because local planning authorities collect the levy and apply it as they choose – within prescribed parameters, of course – they are instructed to establish charging schedules. This was to be completed as of April 2014 but now is likely extended to April 2015. Those authorities can also set different rates for different sized developments, however they must establish evidence to justify those different rates.

Importantly, a “CIL in kind” provision allows that developers themselves may be best suited to build certain infrastructure components using cost-effective methods. For example, when building a community of 50 homes, the developer or homebuilder might be able to establish water and other utility services with the equipment they already have in place, where they are most familiar with the land and adjoining infrastructure. It could be much more cost efficient than to channel funds through a bureaucracy that then hires a third party to do the work.

A columnist for The Guardian who writes on local government issues took a swipe at the CIL for having a significant unintended consequence. Ian Blacker wrote in October 2012 that the CIL may actually be reducing the number of affordable homes. He cites how in London, the mayor wants to channel CIL funds to the gargantuan Crossrail project, not social housing. Also, that the CIL funds in any planning authority can be geographically used anywhere in that authority, well removed from where the infrastructure needs are increased by new development.

Blacker concludes the CIL is uncharted territory, stating “we are entering the realm of unintended consequences.” To the developer, joint venture land investment managers as well as the local planning authorities, this may be unsettling news.

But the demand for housing is hugely unmet; investors in development still find places to build and where the return on investment makes it worthwhile. Whether or not the CIL cuts into planning gains is yet to be determined; would-be UK capital growth fund investors are encouraged to consider CIL costs and speak with an independent financial planner to see where real estate investments might fit within a broader investment portfolio.

House builder Stocks Rise in 2015: Confidence is in the Home Buyers

Market analysts were pessimistic in January. But the Help to Buy scheme is one of many reasons investors in builders, land and infrastructure see things looking up.

The investors in UK homebuilding and related economic sectors might be forgiven for wearing a neck brace in 2015. This would be due to a type of whiplash in how market analysts are seeing the industry, particularly in the run-up to the General Election.

After bearish predictions in January and February, alternative investments in art or antique cars might have taken capital away from land, building and construction supply industries. Knight Frank announced in mid-February, “expectations for future price growth fell to the lowest level in 18 months,” a finding of its Markit House Price Sentiment Index (HPSI) survey. About four weeks earlier, Bloomberg Business reported that shares in Taylor Wimpey, the UK homebuilder, fell 6.2 per cent while Berkeley Group Holdings, Persimmon, Barratt Developments and Right move, a property website, all were categorised to underperforming. These dim predictions were based on negative news regarding mortgage approvals, housing transactions, lower UK GDP growth and weak house-price data at the beginning of the year.

But Knight Frank’s numbers in February weren’t all that bad, and new information in March has homebuilders looking good again. Its report was in fact about price expectations, a measure of consumer confidence. Expectations for future price growth overall fell to the lowest level in 18 months, but of the 1,500 households surveyed in the UK almost one in five said the value of their homes had risen in the past month (compared to 6 per cent who said their home prices fell).

Which is probably related to what came next, which is the Reuters report in early March 2015 that Taylor Wimpey profits rose 68 per cent in 2014, enabling the company to double its final dividend, cheering investors. What may further encourage strategic land partnerships is that the house builder credits some of its profitability to investments in UK land over the preceding five years. The firm built 12,454 homes in 2014, a small but significant dent in the UK’s housing shortage problem. The Department for Communities and Local Government says that 118,830 new homes were built in England in 2014, short of the need but far ahead of 70,000 and 80,000 totals of just a few years ago.

The strong demand for housing has much to do with these companies’ fortunes, of course. More than two years in the Help to Buy scheme, the Government’s program me that allows borrowers to get on the property ladders with only a 5 per cent deposit and a loan worth 20 per cent of the property’s cost, the Mortgage Advice Bureau, an independent mortgage brokerage, says that the scheme has had a material and positive effect on both buyers and builders.

The Mortgage Advice Bureau, an independent mortgage brokerage, says that Help to Buy has had a material and positive effect on both buyers and builders. Lower-cost homes - at £205,000 versus the market average £230,000 – were being purchased by Help to Buy clients, who earn about 19 per cent less than average homebuyers. “The data also suggests the supply of new homes in 2014 would have been noticeably worse without Help to Buy,” says the company’s new homes director. “There would certainly have been fewer first-time buyers able to push their way to the front of the queue. This is one state scheme that has hit its mark and it will be up to the next government to build on this commitment with more radical and forward thinking measures to give house building the necessary boost.”

Leading up to the General Election, there will certainly be more talk about the country’s housing shortage. This is hardly news to the industry, including investment partnerships that identify land that can be rezoned for residential and commercial building.

And while the excitement of high demand for any product can draw investors from far and wide, they should take a position with fair caution. An independent financial advisor should be consulted for objectivity and seasoned advice.

Have Home Prices in London Peaked?

Price growth may have slowed, but across the board most Brits think home values will continue to rise. The government home buying stimulus has helped.

Do the sometimes-stalled housing price levels in London say anything to the would-be English homebuyer? Or for that matter, to the homebuilders or anyone investing in UK land for development?

On a month-by-month basis, probably not. Stocks in publicly-traded national homebuilder companies dropped early in 2015 on the news that prices had declined in December and January. But that says more about the sometimes-short sighted nature of the markets. In fact, year-upon-year prices in London were up at the end of 2014, and 2015 is showing evidence of increasing prices as well. Tales of a bursting bubble are, for now, an exaggeration that land investors and home builders should not use to build a business plan.

Home prices need to be viewed more broadly across the UK as London is an extreme case. Foreign buyers who buy luxurious properties at stratospheric prices in the Capital City have little influence on the price levels in Manchester, Leeds, Edinburgh and Southampton. In the February 2015 Markit House Price Sentiment Index from Knight Frank, a measure of homeowner confidence in real estate values, all regions of England and Wales reported price value increases for that month (Scotland is an outlier in showing a slight drop). And as far as expectations in the year to come, all regions showed even greater optimism about what 2015 has in store for them.

“The easing in house price sentiment indicates that the market is in for a steadier year than 2013 or 2014,” according to the head of UK residential research at Knight Frank. “While buying intentions are relatively high, there is less conviction that prices will rise strongly this year. Just 43% of households expect the value of their home to rise over the next 12 months, compared to 55% in February last year.”

UK Joint venture partnerships (JVPs) that are in the residential development business still have to choose which markets to build for: first time buyers or those moving further up the property ladder. What is clear is that Government schemes to boost first-time homeownership have indeed accomplished that goal. And in response, homebuilding has gone up.

The Help to Buy programme, introduced in late 2013, allows first-time buyers to venture onto on the ladder with a number of advantages. Some facts about the scheme:

• Government guarantee to banks on mortgages up to 95 per cent LTV (loan-to-value). This is of obvious benefit to working households which are currently renting and already have children and for whom saving for a deposit is difficult.
  
  
• Help to Buy programme users earn 19 per cent less than the average homebuyer (i.e., it is helping lower-income households to nonetheless become property owners).
  
  
• The average house price of Help to Buy purchases were about 11 per cent lower than the market average of £230,370 (i.e., lower-cost homes are moving well due to the scheme; i.e., it’s not a plan gamed by those who do not need it).
  
  
• Of the 118,830 new homes built in 2014 in England, almost 25 per cent (28,666) were built under the scheme. While no precise stats are available on how many JVPs were involved in those buildings, the Office of National Statistics (“Output in the construction sector”) reports that in 2013 private-sector house builders spent 11 times more on construction than builders of social housing.

Of course, it helps that mortgages are now available in all sectors at rates below 4 per cent (rates can be as low as 1.99 per cent for borrowers with 10 per cent or larger deposits).

Still, it bears mentioning that overall home affordability remains a problem. According to Shelter, the housing charity, average house prices are now 10 times the average wage of first-time buyers. In 2000, that number was five times the average wage. UK property funds directed at converting empty property to built homes, while driven by the profit motive, do effectively reduce upward price pressure by increasing overall housing supply.

Be it land investments or buying shares in real estate investment trusts (REITs) or other real asset investing, individual investors need to seek objective analysis of the prospectus. Speak with an independent financial advisor regarding any positions that can affect your portfolio and tax status.