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How could development finance help tackle the housing crisis?

The ongoing Brexit saga has had a ripple effect on most, if not all, UK industries. If we are to narrow in on the finance sector, we have seen the economic and political uncertainty act as an incentive for investors to explore alternative markets that are not just safer, but also offer stronger returns.

Playing perhaps the most important role here are the low interest rates, which have remained at 0.75% since August 2018.

As a result, particular avenues of investment such as development finance have grown in popularity; not only can this form of investment typically offer reliable returns, but it also makes investors’ money work harder without requiring them to commit to long-term investments. But the benefits naturally extend beyond the investors themselves. Indeed, they have the potential to support housebuilding efforts across the country and ultimately help address the ongoing housing crisis.

With the real estate market feeling the strain of Brexit uncertainty, development finance could be the stabilising force needed to buoy the sector.

In saying this, however, there is still a distinct lack of awareness amongst investors and consumers alike, in terms of the potential returns on offer from development finance. So how, then, can development finance help support the ambitions of investors, whilst also offering a boost to the wider UK property market?

What does development finance have to offer?

As the term suggests, property development finance describes a form of loan used for property development – whether this is refurbishing an existing house or building a new development from the ground up. In general, such loans are typically offered on a short-term basis and have a pre-defined exit strategy. One type of development finance in particular that is quickly growing in popularity is debt investment.

At FJP Investment, we’ve witnessed first-hand the increasing number of people moving to debt investment as a means of achieving regular, fixed returns. Indeed, 30% of the 950 UK investors we recently surveyed said that it was precisely these characteristics that they considered the main strength of debt investment.

To offer some more insight, loan notes (the instrument by which debt investments are agreed) have a predetermined date of maturity, meaning that investors don’t have to worry about a sophisticated exit strategy. Rather, the capital is provided to the developer upfront and the principal is repaid, with interest, by a set date. This means that investors can expect reliable returns and a clearly defined exit strategy.

What is the role of development finance in solving the housing crisis?
While Brexit has naturally dominated the headlines in recent years, the unresolved issue of the housing crisis remains festering beneath the surface. According to current forecasts, the UK needs to build approximately 300,000 new homes a year by the mid-2020’s if we hope to address the chronic undersupply of housing.

One of the most pervasive reasons why demand continues to outstrip supply is that developers – particularly SME developers – cannot access the finance required to drive housebuilding projects. According to a recent survey, 57% of small developers identified access to finance as the biggest obstacle they currently face. This comes in amidst a climate where many traditional lenders like banks and other high street lenders are reticent to loan money, with developers like these unable to get the funding they need to carry out these vital construction efforts.

This shortfall in investment for construction projects and property developments suggests that the market is yearning for alternative sources of finance – a gap that development finance is primed to fill. This financial instrument allows developers to access private finance, using it to construct more homes and scale their operations to the benefit of the wider public.

At the same time, development finance can be employed to utilise existing housing stock and make the most of homes that would otherwise sit empty.

Development finance is commonly used for refurbishment purposes in order to repair properties that sit in a derelict state – with the hopes of then putting them back onto the market to resell at profit. The incentive for investors is clear, but it also represents a way to make use of existing housing without having to rely solely on the completion of new-builds to meet targets.

Development finance shows real promise in terms of its potential to stabilise the real estate sector. It’s positive to note, therefore, that its popularity is growing steadily; according to the aforementioned FJP Investment research, 9% of UK investors currently hold some form of debt investment, with 20% considering doing so in the coming 12 months. Could this offer some much-needed relief to the property sector and ultimately work to support nationwide housebuilding efforts?

By Jamie Johnson

Source: The Armchair Trader

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‘Three million new homes needed’ to solve housing crisis

A housing charity has called for the Government to spend £214 billion on creating three million new homes to solve the social housing crisis.

In the wake of the Grenfell disaster, Shelter brought together 16 independent commissioners from across the political spectrum to write a report on the issue.

It urges ministers to invest in a major 20-year housebuilding programme and massively extend the criteria for who is applicable for social housing.

The report recommends building 1.27 million homes for “those in greatest housing need”, including homeless households, the disabled and long-term ill, or those living in very poor conditions.

It also wants the Government to create 1.17 million homes for what it calls “trapped renters”, younger families unable to get on the housing ladder, as well as 690,000 homes for older private renters who face housing insecurity beyond retirement.

The authors of the report, who include former Labour leader Ed Miliband, ex-Tory chairman Baroness Warsi, Baroness Lawrence, mother of murdered teenager Stephen Lawrence, TV architect George Clarke and Grenfell survivor Ed Daffarn, spent a year speaking to hundreds of social tenants, more than 30,000 members of the public as well as housing experts.

Their findings suggest it would require an average yearly investment of £10.7 billion to pay for the new homes, but analysis by economic experts suggests up to two-thirds of this could be recouped through “housing benefit savings and increased tax revenue each year”.

The charity said that, on this basis, the true net additional cost to the Government would be about £3.8 billion on average per year over the 20-year period.

Baroness Warsi said: “Social mobility has been decimated by decades of political failure to address our worsening housing crisis.

“Our vision for social housing presents a vital political opportunity to reverse this decay. It offers the chance of a stable home to millions of people, providing much needed security and a step up for young families trying to get on in life and save for their future.”

Mr Miliband said: “This is a moment for political boldness on social housing investment that we have not seen for a generation.

“It is the way to restore hope, build strong communities, and fix the broken housing market so that we meet both the needs and the aspirations of millions of people.”

Other suggestions in the report, which will be presented to Prime Minister Theresa May and Labour leader Jeremy Corbyn on Tuesday, include creating an Ofsted-style consumer regulator to protect residents in social housing and private renting, a new national tenants’ voice organisation and improved national standards in maintaining publicly-owned homes.

Communities Secretary James Brokenshire said: “Providing quality and fair social housing is a priority for this Government and our Social Housing Green Paper seeks to ensure it can both support social mobility and be a stable base that supports people when they need it.”

He added: “Our ambitious £9 billion affordable homes programme will deliver 250,000 homes by 2022, including homes for social rent. A further £2 billion of long-term funding has already been committed beyond that as part of a 10-year home-building programme through to 2028.

“We’re also giving councils extra freedom to build the social homes their communities need and expect.”

Source: iTV

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The role of modular in addressing the UK’s housing crisis

The UK’s housing crisis demands urgent answers and decisive action. The gap between the number of houses currently being built and the number required is alarming and is exacerbating the unaffordable house price issue. Nationwide, housebuilding needs to almost double to hit the government’s target of 300,000 new homes a year by the middle of the next decade.

It is not just a question of picking up the pace of construction, however quickly. The critical point is to deliver affordable housing. In 2017, 70,000 families were forced to live in emergency housing.

This will require political will and innovative thinking. In London, for example, the Office for National Statistics (ONS) estimates that 844,000 new homes will be needed by 2041 – but that fewer than 54,000 have been built in the previous two years. There is certainty a case to be made in favour of easing construction restrictions on parts of the green belt: not to damage the  integrity of rightly cherished areas of natural beauty, but to consider developing portions of brownfield land which has an arbitrary ‘green’ designation.

This, however, will achieve little if most people continue to be priced out of the market. According to a recent report by the CBRE, barely a quarter of homes built or approved on greenfield land in the past decade are considered affordable under the government’s definition.

There is no easy solution to the affordability problem. But there are compelling reasons to think that modular housing has a part to play.

The UK’s housebuilding industry faces stifling cost pressures. Resources, skills, and materials are in short supply. Last year, for example, research by the Federation of Master Builders found that some small building firms were being told to wait for more than a year for brick orders.

One advantage of modular houses is that they have the potential to save more than a third of the costs of construction. They can cost as little as £125,000 to build – compared to an average of £200,000 using traditional methods. Off-site production allows for materials and components to be purchased in bulk, and the manufacturing methods are far more efficient.

Prefabricated homes can be built in as little as three to four days – and the process is not easily disrupted, for example, by the whims of UK weather conditions.

Today’s prefabricated homes are typically at the highest end of the energy efficiency scale. The use of a repeatable template in their manufacturing helps new forms of renewable energy and heat recovery systems to be widely adopted – and reduces the potential for defects in their replication. In other words, they have turned quality of construction and efficiency into their hallmarks.

What about their desirability? Architects have long held qualms that modular construction constrains design creativity. This may have been a defendable view in the past. But recent technological innovations, such as in 3D modelling, have unleashed a new wave of ingenuity. The result is that modular buildings, large and small, require every bit as much creativity and skill as their traditional counterparts.

We have supplied our own proprietary modular building method to Be First, the London Borough of Barking and Dagenham’s regeneration company. As an example of modular, this is a volumetric manufacturing method, which expedites the assembly of low-energy homes, fitted-out, completed and manufactured offsite using precision methods of engineering to provide robust, high-design, high-quality modular housing.

There is no questioning that investment in modular housing is growing. London’s City Hall has indicated that it is willing to give more funding to modular development. Homes England has also provided financial support for the industry. Earlier this year, Sadiq Khan, the Mayor of London, awarded £11 million from the GLA Innovation Fund to a group of 16 London Boroughs that plan to deliver modular housing as emergency housing for homeless families.

Design challenges remain. If the sector is to reach its potential, modular manufacturers need to do more to foster greater standardisation of their respective building methods – to make modular housing a viable option on a large scale.

It’s important to recognise, however, that in itself modular building is not a panacea. There is a broader framework to be fixed. Finding solutions to the UK’s dearth of affordable housing will require developers and landowners to come together with local councils and communities on a much grander scale. Land urgently needs to be freed up. Reducing the price of constructing homes will not tackle the roots of this crisis if we cannot find affordable land to build them on.

The £500 million increase in the UK’s Housing Infrastructure Fund in the Chancellor’s last Budget is an encouraging step. It is welcome that the funds are being focused on parts of the industry currently better able to build affordable homes, such as the housing associations. But a great deal more needs to be done if we are to make inroads into the estimated £68 billion that needs to be spent, to build 300,000 properties per year required to keep pace with demand. Modular building is a very good start.

Source: Open Access Government

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Green Belt must be ditched to solve housing crisis: IEA

Green Belt regulations are standing in the way of young people getting on the housing ladder, a right-wing think-tank has claimed.

Mark Littlewood, director general of the Institute of Economic Affairs (IEA), said the only “meaningful” way to resolve the housing crisis and build the required number of new and affordable homes was to sweep away out-dated rules protecting the Green Belt.

Mr Littlewood said: “The only meaningful way to solve the issue of unaffordable housing is to liberalise the planning system and build more homes.

“The concept of the Green Belt is widely out of date, as much of the land protected by Green Belt regulation is not environmentally valuable or scenic in the first place.”

He was commenting after a report was published by environmental group, the Campaign to Protect Rural England (CPRE), warning against the abuse of planning regulations.

The report said there were 460,000 homes planned to be built on land that will soon be released from the Green Belt.

The CPRE report stated: “Moving Green Belt boundaries when reviewing local plans makes it easier for local authorities to release land for housing, but is only supposed to take place under ‘exceptional circumstances’.

“This strategic shrinking of the Green Belt, as a way of getting around its protected status, is as harmful as building on the Green Belt itself.”

But Mr Littlewood claimed that, because house prices have risen four and a half times since the 1970s, we are facing a crisis in the UK whereby there is simply not enough affordable housing.

He said: “No other OECD country’s experience has even come close. The UK’s housing crisis must be addressed, and even mild embrace of planning liberalisation is a step in the right direction.

“In essence, we are prioritising the protection of dump sites over the opportunity for young people to get on the housing ladder.”

But the CPRE report disagreed with such arguments, claiming building on the Green Belt was “not solving the affordable housing crisis, and will not do so”.

It pointed out that, in 2017, 72 per cent of homes built on greenfield land within the Green Belt were still unaffordable by the government’s own definition.

Andrew Montlake, director at Coreco, said: “Why should the new generation lose the Green Belt? There needs to be a proper joined up, long-term housing plan that is outside of party politics.

“It is never dealt with properly by any government despite being an election priority. They can deal with a better planning system, and better tax regimes, and so on.”

He added: “The government should have nationalised their own house builder and set to building proper affordable homes in areas needed.

“I do agree that empty homes should not be left empty for five years or more, however.”

Source: FT Adviser

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Government ‘rewriting rule book’ to ensure councils meet home-building targets

Theresa May has insisted the Government wants to be “rewriting the rule book” on planning in a bid to solve Britain’s housing crisis.

The Prime Minister acknowledged there is a “real problem” and a need to build more homes, with councils to be encouraged to develop plans for their area or face intervention.

An overhaul of planning laws will see the creation of new rules to give councils targets for how many homes they should build each year, taking into account local house prices, wages and the number of “key workers” such as nurses, teachers and police officers in the area.

Higher targets will be set for areas with higher “unaffordability ratios”, Housing Secretary Sajid Javid has said.

UK construction figures
The Government is claiming it will overhaul planning laws (Joe Giddens/PA)

The Prime Minister has made housing a key domestic priority as more young people struggle to get on the property ladder.

Mrs May told BBC One’s The Andrew Marr Show: “We do have a real problem in this country. We need to build more homes.

“There are too many people in the UK today, particularly young people, who fear that they’re never going to be able to own a place of their own.

“What I’m doing on Monday is setting out how we’re rewriting the rule book in terms of planning, so we’re saying to councils you’ve got to take local communities into account, you’ve got to ensure you’ve got a proper plan for your local area – if you don’t have it, the Government will intervene.

“We’re ensuring we won’t see so much money spent on expensive consultants by setting the number of homes on a national framework, national calculation on the number of homes needed in each area.

“But also what we as government are also going to do is release more public sector land for homes and make sure actually as we do so, some of those homes are affordable for key people like nurses working in our public services.”

Mr Javid also warned local authorities he would be “breathing down your neck every day and night” to ensure home-building targets are met.

Housing, Communities and Local Government Secretary Sajid Javid
Housing, Communities and Local Government Secretary Sajid Javid (Victoria Jones/PA)

“We need a housing revolution. The new rules will no longer allow nimby councils that don’t really want to build the homes that their local community needs to fudge the numbers.”

Mr Javid said homes would not be built on green belt but any area outside “naturally protected land” would be free for construction.

He also revealed plans to build new towns between Oxford and Cambridge.

“Along that corridor there’s an opportunity to build at least four or five garden towns and villages with thousands of homes,” he said.

And he said rules will be relaxed for homeowners who want to add storeys to their houses.

Shadow housing secretary John Healey
Shadow housing secretary John Healey (Dominic Lipinski/PA)

He added: “In the week he’s surrendered £800 million of unspent housing funds to the Treasury, more buck-passing from Sajid Javid isn’t going to cut it. It’s time the Tories changed course, and backed Labour’s long-term plan to build the homes the country needs.”

Source: Shropshire Star

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Access to loans is vital for SME developers

The role of small and medium-sized developers is now seen as crucial in helping to solve the housing crisis but access to finance still remains their toughest barrier to overcome.

The government has a target to build one million new homes by 2022 and the only way it can get this done is creating initiatives that make it worthwhile for SME developers to get building.

When the secretary of state for housing, communities and local government, Sajid Javid, launched the housing white paper, Fixing our broken housing market, he said he wanted to create diversity among firms building homes and move away from the dominance of the top 10 housebuilders.

Since then the profile of the SME developer has soared. Housing association L&Q, which is positioning itself as a rival to some of the major housebuilders, wants to partner with small developers as it expands its housing reach into the regions beyond London. Kent-based developer Quinn Estates is also championing the SME by setting aside 20 plots within its 1,400-acre garden village project in Sittingbourne, Kent, for small housebuilders to buy and build on.

It’s really encouraging to hear of big names like these bringing diversity to their schemes by tying up with small builders and we believe that when the draft London Plan becomes policy this year, their credibility will rise further.

Anyone doubting the importance of small and medium-sized developers in the challenge to meet the country’s housing need would certainly have been silenced after the mayor of London published his draft London Plan.

Encouraging SME builders in London

Mayor Sadiq Khan wants to increase London’s housing target to 65,000 homes a year, roughly double the capital’s current rate of housebuilding, and one of the ways he expects this to be achieved is encouraging SME developers to build on London’s small sites.

Small sites, those that can accommodate between one and 25 homes, according to the mayor, have the capacity to deliver 24,500 homes a year. That’s more than a third of London’s annual housing need.

The mayor says to help small developments to come forward he will ask local authorities to approve planning permissions from SME developers unless they deviate from design standards.

This is indeed a welcome initiative as planning permission can be a huge obstacle for any developer to overcome but particularly for small developers that cannot afford to pay top price for land which already has planning approval.

Proactive policy-making like this serves to push SME developers to the fore in the housebuilding crisis, as did the changes to section 106 arrangements, which exempt developments under 10 units and less than 100,000 sq ft.

Development finance

After the announcement by the chancellor that the taxation of buy-to-let properties, often the bread and butter of small developers, would be changed to a less favourable system and the introduction of a 3% stamp duty surcharge on the purchase of second properties, it became difficult for small housebuilders to calculate the GDV of a scheme. Allowing an exemption for small schemes from section 106 arrangements has really helped in this respect.

These types of policy changes promote the important role of small developers rather than large housebuilders turning out over 100-plus units and definitely make a compelling argument for an SME housebuilder to take on a project. But there is one piece of the puzzle not being talked about in any of these initiatives – and that’s development finance.

It’s time bridging and development finance lenders played their part. It’s very hard for the small developer to get mainstream development lending at all

If the developer cannot access finance to purchase the site and begin the build, the opportunity to contribute to the mayor’s target is lost, the chance to work with leading housing associations is gone and the communities secretary’s vision of a diverse building sector will not be realised.

In a recent survey, 57% of SME developers said access to finance was their biggest obstacle. This should serve as a real wake-up call to bridging lenders and alternative finance providers to step up and offer flexible financial products to allow small and medium-sized developers to play their part in housing delivery.

The government is, to some extent, doing its bit. When the Homes and Communities Agency rebranded to Homes England last month, chairman Sir Edward Lister said the body would continue its focus on supporting SME developers financially. He added that Homes England had received an indication from the government that more money would be allocated to the existing £1bn short-term loan fund for small developers.

It’s time bridging and development finance lenders also played their part. It’s very hard for the small developer to get mainstream development lending at all. Being locked out of mainstream channels pushes them towards different sources of finance, many of which have high minimum loan sizes and relatively high interest payments that have to be serviced monthly. For a developer trying to get a scheme off the ground, this can be difficult to manage.

To help, West One is close to launching a development finance product with a minimum loan of £500,000 and an interest rate of around 7%. Interest can be rolled up on to the loan and paid at the end of the term. We think the best way to do business with small developers is to offer them loans that are tailored to the project they are working on. For example, we can tailor the term of the loan to suit the timescale of the build.

We’re offering our customers a bridging and development hybrid service that allows them to move through the different stages of the build, refinancing as the scheme progresses, without having to switch lenders.

Short-term lenders

West One will provide the initial bridging loan allowing the developer to buy a site or a property before planning permission has been granted. Post planning they can refinance to a development loan. When the development is complete, they can repay the loan by taking out a further short-term facility with us, giving them breathing time to sell their units.

We thought long and hard about the design of the product to ensure that there were no onerous features that could trip the developer up or impede the progress of the build. And what we have come up with is a simple loan. Our minimum loan size is lower than most in the market because our research showed us that often small developers struggle to obtain finance below £750,000 because they failed to meet other lenders’ minimum entry requirements.

We offer a day-one maximum loan-to-value of 70%, 85% loan-to-cost and 65% loan-to-GDV. Our entry fee is 1% and an exit fee of 1.5% of the loan, not GDV.

SME developers are the ones who are struggling most from a financial perspective in the housebuilding sector. It is vital they are able to get access to the loans they need so they can play a big part delivering the homes the country needs. Housebuilders are being told by the government to get building; it’s time short-term lenders heeded the same message and started lending.

Stephen Wasserman is managing director of West One Loans

Source: Property Week

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Communities Secretary calls for borrowing to invest in building new homes

A senior Cabinet minister has said the Government should borrow money to invest in hundreds of thousands of new homes in what appears to be a significant shift in Conservative thinking.

Communities Secretary Sajid Javid said ministers should take advantage of record low interest rates to deal with the housing crisis, which is “the biggest barrier to social progress in our country today”.

Asked if Chancellor Philip Hammond was on board with the idea a month away from his Budget, Mr Javid told BBC One’s Andrew Marr Show: “Let’s wait and see what happens in the Budget”.

But his call to borrow more cash to pay for spending on housing and other infrastructure appears to echo Labour’s own “fiscal credibility rule”, which states that the government should not borrow for day-to-day spending but be prepared use it to fund long-term investment.

Asked whether there would be a new housing fund to build homes, Mr Javid said: “We are looking at new investments and there will be announcements.

“I’m sure at the Budget, we’ll be covering housing but what I want to do is make sure that we’re using everything we have available to deal with this housing crisis.

Communities Secretary Sajid Javid
Communities Secretary Sajid Javid (Stefan Rousseau/PA)

“And where that means, so for example, that we can sensibly – you borrow more to invest in the infrastructure that leads to more housing – take advantage of some of the record low interest rates that we have, I think we should absolutely be considering that.”

He added: “I would make a distinction between the deficit which needs to come down and that’s vitally important for our economic credibility and we’ve seen some excellent progress, some very good news on that just this week.

“But investing for the future, taking advantage of record low interest rates, can be the right thing if done sensibly and that can help not just with the housing itself but one of the big issues is infrastructure investment that is needed alongside the housing.”

Mr Javid also suggested the Government would not relax protections for the green belt.

new homes

“I don’t believe that we need to focus on the green belt here, there is lots of brownfield land, and brownfield first has been a policy of ours for a while,” he said.

“There is a lot more that can be done, density is a big issue – if you look at the density of London for example, it won’t surprise your viewers to learn that London has some of the highest levels of demand in the country, the density in London is a lot lower than many other cities, Paris, Berlin, compared to most cities around Europe, so that’s one area where you can expand more.”

At the Conservative Party conference this month, Theresa May pledged to “dedicate” her premiership to fixing Britain’s housing crisis as she announced an extra £2 billion for affordable housing.

An extra 25,000 social homes could be built under the plans outlined by the Prime Minister but her promise was overshadowed by her mishap-strewn conference speech and subsequent Tory infighting, and the party remains under pressure to do more.

Environment Secretary Michael Gove appeared to back Mr Javid’s suggestions, tweeting that he was “v impressive on #Marr”.

Shadow housing secretary John Healey said: “If hot air built homes, ministers would have fixed our housing crisis.

“Any promise of new investment is welcome, but the reality is spending on new affordable homes has been slashed since 2010 so new affordable house building is at a 24-year low.”