How Might Greenfield-Brownfield Swaps Promote House Building in the UK?

Investors in UK housing are sometimes stymied by limitations on Greenfield development. Shifting green designations (and vegetation) to post-industrial sites are an option.

The topic of how to utilise UK land has been a hot topic for years. In a 2012 interview with a television reporter, George Osborne favourably credited Cambridge for “swapping some bits of the green belt for other bits.” This upset many, including the National Trust, who felt it overstepped the bounds of what had been promised in the recent liberalisation of planning policy rules. Protection of green belt and Greenfield lands was to be maintained.

But what Osborne was proposing was nothing new. In Cambridge and Cheshire East, green belt swaps are actively proposed and discussed as a means to address the critical national housing shortage. Such swaps ideally result in residential property development, including those financed by joint venture partnerships, on what was previously designated as green belt lands or designed for Greenfield use. The “swap” is to establish Greenfields elsewhere – in areas where they can be of better benefit to society. In some cases, that might even include remediated brownfield land closer to urban centres.

This is important to the sources of financing for house building for several reasons. One is that it opens up options for where new housing might be located. Another is that brownfield lands can be poorly located for where people need to live (i.e., far away from employment or transport) or that remediation of sites that were once in industrial use can be unfeasible. (Brownfields are strongly advocated for use in housing development by rural preservation organisations; that can work in some but not all instances.)

The proposal for Cheshire East hints at the impact this kind of exchange can bring. There, stakeholders request that the council release 80 hectares of publicly owned agricultural land, on which 1,800 homes would be built. Additionally, another 2,000 homes would be built in nearby Crewe. This will require a mix of green belt land and what is deemed “green gap” in local planning. The swap will mean allocating 800 hectares that separate Crewe and the town of Nantwich to establish a new green belt.

Shelter, the housing charity that advocates for broad thinking in development – and which holds the position that development of homes at all price points helps effectively makes all housing more affordable – looks favourably on these land swaps. “In order to achieve economic growth, areas that are of economic importance need to expand,” says the organisation in a 2013 publication it developed in partnership with KPMG (“Homes for the Next Generation, Lessons from the West Midlands”). “Land swaps, driven by the council, can ensure houses are built in areas of high demand while the total amount of green belt land is not reduced.”

And what of those brownfield lands that might go undeveloped as a result? The Government’s Forestry Commission has held since at least 2007 that some brownfields might be better used to establish non-residential community greenspace, which require less stringent remediation efforts. “Trees and plants have been shown to demonstrate huge potential in the reclamation and remediation of brownfield land,” the bureau said in an Information Note titled “Greenspace Establishment on Brownfield Land: the Site Selection and Investigation Process.”

Further, it’s a barrier to sustainable residential community development when a brownfield-to-housing conversion is done where those residents might depend on cars to travel to their places of work. Public transport systems are largely designed around existing population distribution, not necessarily where redundant factories now are shuttered (and may have been for decades).

The savvy participants in joint venture land investment are wise to study such matters of greenfield-brownfield conversions, as it can have a significant impact on where communities are established and why. But would-be investors should also speak with an independent financial advisor to judge where any form of land and real estate equities or bonds fit a general asset growth/income plan.

Can Nick Clegg’s Garden Cities Deliver the Housing Needed in the UK

Many more homes must be built in the UK. While garden cities might deliver homes on a large scale, smaller, privately-financed developments are already being built.

Deputy Prime Minister Nick Clegg made a definitive statement of support and intent in 2014 to build garden cities in the South and South East portions of England. Modelled around “good life” and sustainability concepts, the planned communities would contain 15,000 or more homes each – a scale much larger than developments currently being built in and around towns and cities.

No one questions the need for more housing in the UK, where home prices and rents are rising ever upward and the number of households waiting for a home is estimated at one million. Public policy and support with infrastructure development (roads, schools, utilities, etc.) are required for both garden city developments and those brought about by private investment, and Clegg acknowledges that at least £1 billion will be required of the national Government through a Large Sites Fund to stimulate development of sites involving at least 1,500 homes.

Private capital growth fund investors may get involved in these schemes. Fortunately, those investors are already working on multiple projects of lesser scale that are delivering much needed new-built homes today. The involvement of the private sector, from both individuals and institutions, remains an essential factor in market-rate and affordable housing.

The economics of development always include some cost sharing between the private and public sectors on infrastructure, but the degree of red tape can stall projects to a maddening degree. With high-level support from Clegg, however, there is the promise these issues will be handled in an effective way. But when the Government attempts large-scale programs, it also draws higher-profile opposition. According to the report “Unlocking Garden Cities/March 2014” (from the London-based GVA organisation), “political opposition and the planning process are at least in part responsible for delaying or preventing delivery at large urban extension sites.” The Guardian reported in August 2014 that special compensation may be necessary to appease existing homeowners whose properties are affected by garden city developments in their close vicinity. Clegg cites the development of large housing districts following the Second World War (Milton Keynes, Welwyn Garden City, Corby, Aycliffe and Hatfield among them) as examples that provide a model for addressing 21st century housing needs.

Whether or not the Coalition Government, or its successor after the May 2015 General Elecion, can effectively develop garden cities in the next five years is subject to question, debate and decision-making. In the meantime, individual investors working through such entities as property fund partners are building new homes on, arguably, a more organic basis. Rather than the creation of new municipalities – what garden cities essentially are – smaller scale developments achieve planning approvals to develop raw land into homes and the infrastructure required to support those homes within extant jurisdictions. In most cases, the land is purchased at a market rate (pre-development) and the properties created are largely sold at market rate prices (post-development). With greater local housing supplies the costs to buy or rent experience downward pressure.

No investor should go it alone on real estate schemes, however. People interested in participating in the UK’s land-to-housing development boom need to speak with an independent financial advisor to determine an appropriate risk level for their investment.

Why Are Homebuilders Only Now Beginning to Answer the High Demand for Housing?

Home construction in the UK has lagged behind population growth for several reasons. But determined investors and homebuilders are now moving ahead.

The UK Department for Communities & Local Government reported near the end of 2014 that housing starts for the third quarter were at 35,260, down by almost 4,000 starts from the second quarter of the year. But overall, starts have climbed since the historic low of 16,420 starts in the fourth quarter of 2008, an obvious result of the global financial crisis of that year.

Investors in development and homebuilding naturally keep tabs on these numbers, as the supply-demand mechanisms seem askew in the UK. Everyone – including property fund partners, for example, who buy and develop UK land on which homes will ultimately be built – knows that there is a great need to increase the housing supply in the country, a degree of demand that has been building for more than a decade. And yet homes sold at market prices as well as affordable and social housing lag far behind demand. An estimated one million households are thought to be waiting it out in shared flats and houses with family or friends.

The simplest answer to this conundrum is that home prices are simply too high and that younger, working households are not able to meet credit requirements. But why do natural market mechanisms and innovation not find answers to this dilemma? Economists weigh in with their thoughts along the lines of the following:

• The greatest undersupply is in London, where housing is already most dense. There simply is nowhere left to build there, as well as in other more popular, overpopulated areas.
• Greenbelt preservation, laudable in its goals, prohibits building. These are areas established almost 100 years ago when the population was less than half of what it is today.
• The Thatcher-era approach to council housing. While also laudable in turning some lower-income renters into homeowners, new social housing (as it is now called) construction has failed to keep up with younger, lower-income populations.
• Vested interests? The homeowners who are confronted with planning authority proposals to increase housing in their vicinity ardently protest new building as it could simultaneously create congestion, increased demand for finite city services and lower their own homes’ value by increasing local supply.

These are not easy forces to overcome – even when the national conversation has pushed Government policies to create solutions. Those include the Localism Act, which through the National Planning Policy Framework (NPPF) enables local planning authorities to make local decisions based on local needs. More than half of those authorities have formulated five-year growth plans, while others approach land-use changes on an ad hoc basis.

The role of the investors is critical to expanding the housing supply. UK strategic land developers – who work with financing from institutional investors and private individuals – will study where housing is needed most, then identify sites where development would be most beneficial. Where owners are willing to sell and local planning authorities will grant approvals, infrastructure is developed. Increasingly, the land is then sold to homebuilders who understand what kind of housing stock is most likely to sell and can be constructed profitably.

Investors have to consider where real estate might fit into their overall financial planning. This is why speaking with an objective, independent financial advisor is always advised in conjunction with all investment decisions.

What Development Hurdles do Large Landowners Face - and What Advantages do Strategic Land Consultants Bring?

Raw land can significantly increase in value when residential use is approved. But landowners need to work with land professionals to achieve optimal value growth.

To satisfy the crush of housing needs in the UK, local planning authorities are all but required to increase the inventory of homes in their jurisdictions. About half of towns and cities lag in setting forth plans to indicate how they will do that – indication of both how much is left to be dedicated to development as well as the fact that many planners can yet be influenced on where building should take place.

The opportunity for landowners to make money is strong. But in most cases they should not assume they can go it alone – nor can they net profits from development in a clean, simple deal. The Town and Country Planning Association – noting that since the 1947 Town and Country Planning Act that landowners cannot develop land without planning permission – says that while agricultural-use property might sell for £3,000 to £10,000 per hectare, the value can increase to as much as £2 million per hectare in “areas of highest demand.”

Sounds like winning the lottery, doesn’t it? Well, not anytime soon. A planning gain supplement, referred to as a Section 106 Agreement, is essentially a tax on those who experience a significant gain in value from a land sale. The obligation this imposes, negotiated between the developer and the local planning council, is intended to cover costs from increased infrastructure (schools, roads, hospitals, sewers, etc.) driven by new residents or commercial development. Another form of this is the Community Infrastructure Levy, which is used in some jurisdictions. In any event, the large profit to be made will be diminished significantly by this obligation.

And the negotiation of these charges is merely one aspect of the development process, one that requires a skilled sense of economics and local politics. But the reason investor-developers such as property fund partners, not original landowners, more typically orchestrate the conversion of raw land to homes is due to the broad range of skills and experiences required to complete the process. Those include:

• Viability assessments, to determine the suitability of the land for development as well as the cost-return evaluations (referred to as the threshold value).
• Site assembly (plans for how it will be developed, to appease planning authorities)
• Access works (costs in road building, for example)
• Remediation (more typical of brownfield development, where toxins need to be removed)
• Abnormal groundwork (managing geological problems, such as bedrock outcroppings or floodplain remediation)
• Relocation costs and buyout of existing residents (if any)

Some developers might work with their own construction firm to build roads and utilities, as well as the homes themselves. But many now contract or sell parcels outright to homebuilders, engaging in road and utility construction only. This may diminish their profits, but also turn the land over to parties who can focus their efforts on their skill set, designing and building homes that are right for the likely buyer.

Existing landowners still can enjoy net asset gains when selling to a real asset investing group. They can work with independent property professionals to determine fair pricing.

Individual investors who themselves do not have real estate experience very often make up a portion of the investment group. They can work with as little as £10,000 to participate in a fund; such investors are strongly urged to work with an independent financial advisor to chose the investments that are appropriate for their personal wealth risk profile.