Has Localism Failed? Osborne Gets Tough on Local Planning Authorities

The post-election proposals from the Conservative Government seem to buck the trend of the 2011 Localism Act. Local councils need to move faster.

David Cameron announced in September 2015 that planning permission would be streamlined with preapprovals for selling off publicly owned lands to housing developers. While a marked departure from standard planning processes, it should come as little surprise to those in the business of housebuilding. It appears the Conservative government is losing its patience with local councils.

“Is it not time to cut out the middleman?,” Cameron asked in a keynote speech covered by InsideHousing.co.uk “Should government not just contract out development on this land and get building on it straight away?”

This is just one sign among many that central Government is growing impatient with local planning authorities (LPAs) and their respective councils over a collective failure to provide for sufficient house building. The country has a critical shortage of homes, building under 140,000 residential units (flats, terraced, detached, etc.) per year when something closer to 250,000 homes each year for the next decade are needed to bring supply into balance with demand.

Investors engaged with property fund managers know the challenges of getting use permission. In their quest to turn unused land into housing, the LPAs have to be assured the new development will not place undue burden on the existing community infrastructure, or that the developers will provide necessary funding (through Section 106 payments or Community Investment Levies) to cover that concern.

Local councils have been asked under the requirements of the National Planning Policy Framework to produce five-year plans, projecting where and how new homes can and should be built in their communities. About half have complied as of mid-2015. The remainder, in addition to being out of compliance, then are subject to the interests of developers with no sense of a master strategy.

Cameron’s Chancellor, George Osborne, has proposed from London several additional changes to the planning system that further undermines the idea of localism. Chief among them is how the Government should intervene to draft local plans when the local authorities fail to do so themselves. Other changes include:

• Penalties to local authorities who make 50 per cent or fewer planning decisions on time.

• No planning approval necessary within a new “zonal” system that applies to suitable (residential-worthy) brownfield sites. Additionally, mayors of London and Manchester are granted stronger compulsory purchase powers to bring forward more brownfield land for development.

• Major infrastructure projects that include elements of housing will be fast-tracked through the Nationally Significant Infrastructure regime (not required to go through full democratic consultation).

• Residential property owners in London are allowed to add up to two storeys to their structures to accommodate additional homes (one restriction is that the addition not be taller than an adjoining neighbour).

This should provide encouragement to private financiers engaged in alternative investments. The lure of the high demand for housing is increasingly attractive as an investment, however some who are new to real property find the planning approval process to be off-putting. With streamlined systems in place and becoming less bureaucratic, such worries are diminished.

Investing in housing or other forms of real estate, land, property - and market-traded equities relating to these - comes with nuance and complexity. Individuals are advised to discuss it with an independent financial advisor.

Does the UK Tax Regime Distort the Housing Market?

Part of how cities and towns accept new housing is through improvements in nearby infrastructure. But how that is assessed fairly is subject to debate.

The UK’s housing shortage problem is one with arguably many causes. Some trace it back to Thatcherism, selling off council housing without guaranteeing that affordable housing would be built to take its place. Others say the planning system, the preservation of green fields, tight financing rules, and the Great Recession of 2008-2010 (and later) all shook out buyers as well as builders.

Now with a resurgent economy, investors involved in strategic land development are betting on building and selling more houses to a country that clearly demands them. They work through and past the planning authorities, select homebuilders to construct houses, and they generally do well when a development is complete. But there still are certain stymying issues.

A good case can be made for the market distortions that some tax structures cause. One example of this is how the Stamp Duty Land Tax (SDLT) affects the price and liquidity of home ownership. On a home valued at under £125,000, there is no tax but until December 2014 there were incremental jumps to a 2% tax (£125,001 to £250,000), 5% tax (£150,000 to £925,000) on up to 12% for homes valued at £1.5 million on up. Those abrupt jumps created artificial reasons for holding down prices and therefore the types of homes that were built were often done so to stay below a SDLT threshold. Critics point out this “slab” system tax was designed in 2000, before the 139 per cent increase in average UK home prices that we have today. A new, incremental rate is progressive but gradual.

Other taxes imposed on developers can also dampen development. When joint venture partnerships form to convert land to housing - in all that entails - investors and builders have to budget for other costs as well:

Planning gain taxes - The objective of land investment funds applied to development is to be granted planning permission to build on land that was previously designated for a lesser (lower value) purpose. Planning gain taxes divert some of this gain to the public sector, which can be a fair way of funding public realm improvements. Some parties are critical of this system, saying the negotiation between developers and planning authorities can be wrought with inconsistency, unfairness, a lack of transparency and lengthy negotiations.

Community Infrastructure Levy - Councils in England and Wales can raise funds for infrastructure from private developers to support public development. It is charged on a per-square-metre of development basis. The benefit to developers of this system (versus planning gain taxes) is that the fee structure is established up front, applicable to all developers without a horse-trading process of negotiations. Planning Resource, an independent planning professionals intelligence firm, provides a current list of CIL charges for developments across the country.

But not all infrastructural improvements are compulsory. Land investors and developers who are strategic land specialists might voluntarily propose and build infrastructure around developments. To do so the developers need to have a fairly good margin on their project.

Individuals and institutions alike look to developers to create value from undervalued land. But all investors are wise to consult with an independent financial advisor for advice on where and how to invest real estate funds.

Detached Home Building is Up in the UK: What are the Implications?

Detached homes are in high demand in Britain by “second stepper” buyers upgrading from their first homes. One step up the ladder allows new people on the first.

There are many variables in how the UK increases its supply of homes to meet the demands of a growing population. Government financing-support schemes (e.g., Help to Buy, Help to Buy Isa, Build to Let, etc.) are showing signs of success, as has the overhaul of the planning process. More recently, incentives for smaller homebuilding firms and an effort to increase the number of skilled workers to build homes have been introduced.

Investors from the private sector too have stepped up their efforts to increase homebuilding, such as when managers of capital growth funds file for land use changes with local councils. They turn unproductive property into residential neighbourhoods, generally because local employers want homes in closer proximity to workplaces.

A new wrinkle in the homebuilding scenario is that in 2014 the number of detached homes rose by 9 per cent over the previous year. This is part of a trend being followed by the National House Building Council (NHBC), which reports that 38,113 new build detached homes were registered in 2014, the highest absolute number in that category since 2004. A total of 145,174 homes were built, making detached homes 26 per cent of the total. Flats and maisonettes constituted 33 per cent of the total registered; semi-detached houses 22 per cent; terraced houses were 18 per cent; and bungalows were just 1 per cent.

This information was met with dismay in some quarters, with complaints that detached homes are more expensive, therefore they do not address the shortage of homes at the lower economic end. Further, because they consume more land they meet resistance from those who wish to limit building on green field and green belt areas.

But certain other variables of the housing market should be considered in this discussion.

These include how Shelter, the housing charity, routinely argues that all types of housing need to be increased. Reinforcing this idea were findings reported in a November 2014 article published by PropertyWire.com, the widely quoted global property new service. These findings, from a report from Lloyds Banks, include:

• Detached houses are the property of choice for homeowners ready to move up the property ladder from their first homes.

• So-called “second steppers” increasingly want four bedroom homes (31 per cent, up from 24 per cent in 2010).

• Homeowners in their first property are staying 19 months longer there than planned (most who want to move up have increasing incomes and family size, or want to add to their families).

• The typical gap between the sale price of a starter home and the purchase price of a second home is £58,400; second steppers fill this gap by savings (37 per cent) and overpaying their first mortgages (41 per cent).

The financing to build the larger, detached homes largely comes from private investment groups such as joint venture partnerships. As they work with local planning authorities to get approvals to build, they have to demonstrate that the demand for housing justifies what is being built. A local employer that needs middle- or upper-management employees needs the housing stock to match, for example.

Putting capital into housing serves the investor as well as the broader economy. Speak with an independent financial advisor about what needs financing and where - and what is likely to optimise your return on assets.

CBI on the UK Housing Shortage: It’s Bad for Business

The million-plus homes deficit in Britain is treated like a social issue. It is that but so much more; leading business organisations have calculated the costs.

It’s conventional wisdom that the UK’s housing shortage is harmful to families. But when people spend too much of their income on homes, or cannot move out of parents’ homes to form new households, it creates a drag on the economy as well.

So says the CBI, “the voice of business,” in its 2014 report “Housing Britain: Building new homes for growth.” According to the CBI deputy director-general, Katja Hall, “Housing is not just a social priority, it’s a key business issue. We see the impact of too few homes being built not just on the front pages of our newspapers but in the experience of our families, friends and colleagues...it also has huge implications for our future economic competitiveness. Businesses need a flexible and mobile workforce, but the high cost of moving home, and lack of decent and affordable housing, are barriers to attracting and retaining employees.”

This is a key driver for those engaged in UK land investment, working to build homes where needed. That almost always is where a local economy is growing and one or several employers want their people to live nearby.

The CBI publication points out that restrictions on land use for new development, a function of the planning permission system has “for decades…caused cyclical house price volatility - a situation that has contributed to macroeconomic instability to the detriment of households and businesses alike.” It also cites statements from Mark Carney, Governor of the Bank of England, who has said that the housing market poses the biggest risk to future financial stability.

The CBI partnered with the Centre for Economic and Business Research (CEBR) to put numbers to these claims. Findings from this and other CEBR research include:

• £4 billion per year - How much extra spending power households would have if housing and commuting costs rose at the price of inflation (the Consumer Price Index), instead of the 56 per cent rise in UK house prices since 2004. That much incremental spending would multiply itself as goods and services are purchased.

• £770 million per year - The portion of that £4 billion that would be saved simply in reduced transportation costs if people could afford to live closer to where they work. That doesn’t account for time savings, which could be substantial. Managers of property funds wisely focus their research on sites that would serve employer needs.

• £5.5 billion - Money spent on suppliers to the homebuilding industry, part of the £12.5 billion invested in land and buildings for homes built per year (based on the 140,000 homes built in 2013, which is only about 60 per cent of what needs to be built).

• 600,000 jobs - Number of people employed in a year when 140,000 homes are built. If 250,000 homes were built, it would bring this up to about one million jobs.

The goals of the CBI are aggressive. They see a doubling of new home building (to 250,000 or more per annum). The business organisation sees it necessary for a “pipeline of land” - the work of specialists engaged in planning permissions - to deliver well-designed homes for sale or rent. Also, innovative financing programmes and an increase in the skilled workforce able to build would further this objective. A simpler and more competitive tax regime, paired with a flexible planning system, are required as well.

Investors in house development understand that both obstacles and handsome returns meet the high demand for homes. What all investors need to do is to discuss their interests in home-development investments with an independent financial advisor.

Building Upward: How the British Feel About High Rise Living

The squeeze is on as the British population continues to increase. London is in a tall building boom, but not all UK residents are willing to let go of their gardens.

The UK has a bit of an identity crisis with regard to housing development. Either we should build up into the sky or out to the green fields - or both (because we cannot afford to do neither).

There are those who take the position of protecting the greenbelts. These include supporters of the Campaign to Protect Rural England, an organisation that opposes Britain’s housing planners’ proposals to develop on a large scale - up to 15,000 homes in various parts of England. Such developments are a modest effort to address the country’s growing population and urgent housing shortage. They propose instead small developments of 6 to 12 homes scattered about the villages (note: that would require 1,250 to 2,500 villages, not all conveniently located). The thinking goes the incremental, distributed approach would impose fewer burdens on infrastructure.

Elsewhere, there are urbanites who have trouble with high rises. Which to the contrary seems only logical: if the country cannot build out, it must go up. This stripe of urbanistvalues human-scaled streets, squares and parks, and mid-height buildings. But has that battle been lost? More than 236 new high rise buildings between 20 and 75 storeys have been or are being built in London. And these are short of The Shard, which at 87 storeys became Western Europe’s tallest building in 2012.

Can we come to some kind of compromise? To anyone engaged in property funds- endeavouring to achieve planning permission to build on raw land - an all-of-the-above strategy is all that is practical. The country is short of one million homes, and the 7 per cent population growth identified in Census 2011 is likely to continue on its trajectory. The population of London itself stands today at 8.6 million people, expected to grow to 10 million in 15 years and to 11 million by 2050. People have to live somewhere.

Of course, it’s well understood that foreign nationals are buying flats in these high rises as investments, rarely if ever actually living in them. But foreign inhabitants in London are hardly new: one-third of Londoners were born somewhere else. Foreign nationals from the U.S. and Asia who are living in London are quite accustomed to high-rise views and long elevator trips to the car park - and much less inclined to tending the primroses.

The traditional English ideal is to live in a detached home with a garden, and that largely remains the case. Many property investors put their cash into real assets to develop homes closer to the ground where cities in the southeast, the west, north and midlands are growing as well. Employers find that locating outside of London enables lower costs for them and their employees. This is why proposed garden cities and other such developments, on green fields as well as brown fields, make a lot of sense.

Investors will go where the money is to be made. To build traditional detached homes, they achieve planning permission to build on unused land; this typically provides a handsome return on the investment. Alternatively, investors in high rises find the higher they build or own in one of the new high rises, the more its value increases - by about 1.5 per cent per floor. At the highest levels in the best buildings, prices begin at £1.35 million (for a one-bedroom flat) and can be worth as much as £15 million. Clearly, these are not the poorly maintained council flats of the 1960s and 1970s.

There are as many ways to invest in UK land as there are types of homes, on the ground and in the air. But would-be investors should always speak with an independent financial advisor to learn which investments and risk factors fit their individual needs and strategies.

Are Newly-Built Homes in the UK More Sustainable?

Indeed they are. But whether new builds or retrofits, increasing the energy efficiency of homes is beneficial to the UK economy in all kinds of ways.

Shockwaves hit the green house building industry in the UK in July 2015 when the Treasury announced it was dumping two planning regulations intended to ensure all new homes were “zero carbon” by 2016. The rationale was that these regulations were burdensome to homebuilders, a position that has some merit given the red tape barriers often cited as contributing to the country’s critical housing shortage.

The Treasury provided some assurances to environmentalists that it would “keep energy efficiency standards under review,” according to BusinessGreen.com, a sustainable business-focused website. The Government acknowledged the benefits of increasing energy efficiency in homes in its statements.

While this elimination of mandates might slow the advance of green home building in the UK, by no means does it suggest a return to the energy-wasteful building practices of the past. Home builders and their investors - frequently those seeking capital growth land opportunities for large-scale new building – have already been doing a pretty good job of constructing what are sometimes referred to as “high performance” homes.

The past dozen or so years of homebuilding have benefited from improved materials and methods, to significant results. The Carbon Brief, a climate science and energy policy news organisation, reported in 2014 that energy use in all UK homes, new and existing, fell by 11 per cent in the decade since 2004. Acknowledging that this was partly due to a warm winter in 2011 as well as household cost cutting due to the 2008-2010 financial crisis, several components that have become standardised in new homes contribute to energy savings as well:

• More insulation, double-glazed windows and better boilers - From the Fuel Poverty Report 2014, the portion of homes in the UK that scored in the middle- to high-efficiency ratings categories went from 45 per cent in 2008 to 70 per cent in 2012. This is attributed to better insulation, energy-efficient modern windows and condensing gas boilers that are replacing older standard boilers and combi boilers.

• Better light bulbs - EU rules that banned inefficient incandescent bulbs forced a rather rapid adoption of much more efficient compact fluorescents and now ultra-efficient LEDs. An energy expert at Oxford University, Dr Brenda Boardman, says that home lighting energy use dropped by 22 per cent from 2000 to 2012 due to better light bulbs – even while home computers and other electronics have added to the load on home electricity in this same time period.

• Energy efficient appliances - Newer, energy efficient refrigerators, ovens, dishwashers and washing machines are replacing older, less efficient models, particularly since 2008.

Because the supply chain for all of these items has learned to be greener, in order to compete effectively in an energy-educated consumer market, it means that all new construction now features greener components. Those who undertake real asset investing in new home construction need not make a tortured decision between “green” and “cost-contained,” as they are one and the same. Some of it came about by mandates, but much due to the advances in technology in response to rising energy prices and concern for the environment and climate.

Investors in home building generally do so for rational reasons - to achieve a good return on investment - however building can also affect social and environmental causes as well. Homes are needed throughout the country in all price strata. But before investing it makes sense to speak with an independent financial advisor to consider the depth and breadth of investing in UK and real estate.

200 Years of Housing Policy History in the UK: We Adapt

The changes in population, construction and infrastructure technologies have certainly improved homes in the United Kingdom. But Government policy has also played a role.

While the UK is truly in a housing crisis it is not without precedent. We need to accelerate building by about 110,000 homes per year to make up for the shortfall, thought to be in total one million homes and made more urgent by a growing population. But the UK has dealt with pressing needs for housing throughout modern history and has always managed to figure out how to do it. The relative stability of British society bears testimony to our capacity for doing so.

Two organisations have recently documented this history. They are the National Housing Federation (NHF) think tank in its report, “The Politics of Housing,” which largely concentrates on the 20th century; and the NHBC Foundation, “Homes through the decades: the making of modern housing,” a look back to about 1800. NHBC Foundation, established in 2006 by the National House Building Council, largely focuses on a sustainability agenda, risk management and consumers.

The NHF report points out that the current level of housing completions has not been this low since the 1930s, with about 115,000 new homes built in 2010 (it rose a bit to 140,000 completions in 2014). It opines that one barrier to government policy not being more successful at building is that the high degree of ownership in the country - about two-thirds of dwellings are owned by their inhabitants - necessarily dampens efforts to increase supply.

Their rationale is if you own a home in a community you like, you are less inclined to encourage development nearby that will alter your community and add burdens to its infrastructure. This is among the key challenges to capital growth partners who buy UK land and seek planning permission to convert to housing.

Note that in previous periods private ownership levels were lower: It was just 10 per cent in 1914, 25 per cent in 1939, by 1971 ownership reached 50 per cent and by 2001 it reached its peak at 69 per cent. By 2011, largely due to the financial crisis of 2008, the ownership rate declined to 64 per cent. As fewer own, more people rent - and the Buy to Let programme has played a large role in meeting some of that demand.

The NHBC Foundation report traces both the types of homes and infrastructure from the Victorian era to the present, crediting reformers, planners, architects, designers, technologists and construction teams for the advances made through the decades. While investors, such as those who prefer alternative investment funds that build physical communities, and government officials probably should be added to this list, it is clear the Foundation report looks at the broad sweep of players in ensuring comfortable and resilient homes for the British.

To coalesce the analyses of these two perspectives, consider the following points. While not in strict agreement from both analyses, several themes emerge:

• Government has always played a role - Victorian mains sewers, flushing WCs and waste collection were critical to the UK’s population growth in the 19th century. This supported the private sector investments that then could build homes in more places and in different ways.

• Population growth has been a driving factor - The UK population grew from 11 million to 32 million in the 19th century, including the urban growth from 2 million to 20 million.

• Housing is closely tied to economic stability - Since the end of the First World War, Government policy has pegged social and financial stability to housing. This led to the large-scale post-war council house building programme.

• Private ownership has risen dramatically - And as it did, privately rented housing dropped from 89 per cent in 1914 to about 10 per cent in 1999 - but has risen to about 16 per cent today. The trend is considered ahistorical and tied to the above-inflation pace of home price increases.

• The quality of housing stock has markedly improved - In the rush to replace a half-million homes destroyed in the Second World War, prefabrication was developed and enabled the construction of a stunning 354,000 new homes in 1954 alone. But that came at a price in quality. Already variable quality in new privately built homes prompted the establishment of a national registration scheme for house builders in the late 1930s. Tower blocks that introduced high-rise living often proved to be social and financial failures.

• Sprawl has always been a worry - Planning principles that apply today (to some extent) were largely established in the 1947 Town and Country Planning Act, which sought to limit suburban expansion.

Today, we wrestle with questions on the inadequate supply as well as the need for sustainable housing. The private sector has proven to inventive in achieving both objectives, however the planning process is still considered unwieldy, as the question first addressed in 1947, to block suburban expansion, is still unresolved. Developers and home builders have the capital to build, but still must convince local councils that development will benefit existing communities.

Investors in housing recognize the present-day opportunity to build for the UK’s rapidly growing population. But the complexities of investing combined with the many variables of housing require that would-be investors consult an independent financial advisor before taking a position of significance.