Building Houses in 2011A Developer’s Perspective

ZeroC• Dorchester based house builder• Funded to deliver up to 150 houses a year• Specialist in high quality, design led, sustainable development

• Current projects include:

– Chichester, West Sussex – Residential scheme of 250 homes– Portland, Dorset – Olympic village for 2012 sailing events (77 homes)– Weymouth, Dorset – New cadet centre and 32 Eco Homes– Yeovil, Somerset – Mixed use code 6 scheme (restaurant/shops/40 homes)– Cumnock, Scotland - New sustainable community of 650 homes– Sidmouth, Devon – 31 home sea front scheme

What’s going down in 2011?• House prices are still falling outside of London• Sales rates are at a historic low• New starts are way below government • targets• Labour costs are static• Material costs are going up• Building regulations are getting tougher• Nobody has any dosh including the banks and the

government• RHI has been delayed and George Osborne seems to

have declared war on plans to cut carbon emissions• Developers, contractors, and suppliers are going to the

wall

Developer Concerns

• Shortage of buyers who can proceed• Lack of development finance• Impact of revised building regulations• Impact of new affordable housing models• Rising material costs• Council Tax for empty properties• Planning costs and bureaucracy• Council inconsistency• Uncertainty over the RHI and the FIT

Note: Shortage of development land is NOT a developer concern in 2011 but it is getting an extraordinary amount of press

Shortage of Buyers• Footfall on sites is a fraction of what it was in

2007• About a third of sales fall through. This is 3 times

greater than in 2007• Buyers cannot raise the deposits they need to

buy homes• Cash buyers are feeling poorer because of low

returns on savings. • First Time Buy scheme favours the nationals and

not the small developer

First Time Buyer Scheme• How it works

– 10% deposit paid by government (HCA()• Interest free for 5 years then low interest until property sold (max 25 years)

– 10% deposit paid by developer• Interest free for 5 years then low interest until property sold (max 25 years)

– 5% deposit paid by purchaser

– 75% mortgage

The problem is that smaller developers cannot afford to tie up their equity in the 10% of the deposit paid by the developer

The government needs to develop a second tier of FTB for the smaller developer/house builder with more favourable terms

Lack of Development Finance• Nationals now have reasonable facilities and have, in many cases,

been ‘restructured’ through government owned banks• Smaller developers have not had the same luxury and those with

land banks have either ‘gone to the wall’ or are constrained by very tight lending criteria:

– Banks offering lower loan to value ratios; Typically 50:50 versus 70:30 in 2007– Banks charging higher interest rates against LIBOR as opposed to base; Typically 3.5% above LIBOR– Many facilities are not being renewed

No easy fix!

Impact of Revised Building Regulations

• New regulations are coming in at an alarming rate and often with quite short notice

• Almost all the new regulations are driving up costs– As a guide, new regulations introduced in the last 2

years have added at least 5% to build costs• Many of the new regulations dumb down good

quality architecture and fail the commonsense test

In difficult times developers need a minimum of 4 years notice of new regulations to allow for proper financial planning of new developments

In the UK one in every 175 people uses a wheelchair but the HCA insists on their disposals that every home is built to Lifetime Homes

Standards to accommodate wheelchair users

Why?

Impact of New Affordable Housing Models

• To say the introduction of ‘Affordable Rent’ has been chaotic would be an understatement!– Affordable housing policy was effectively ‘frozen’ for 12 months– Some authorities still do not understand Affordable Rent– Change from grant funded social rent to Affordable Rent has made

many schemes unviable– New, more flexible, affordable housing models need to be developed

and introduced– S106 legal agreements impose affordable housing commitments on

developers for many years but affordable housing funding policies can change in a matter of weeks!

Central government must make the rules governing the delivery of affordable housing clearer and ensure local authorities keep to those rules. A four year change rule should be rigidly applied

Rising Material Costs

• Inflation in material costs when sales prices are stagnant or falling is not a good recipe for a house builder

• Weak pound (not helped presumably by QE) and rising fuel costs have driven up material prices on top of inflation

We need to import less and start manufacturing more building products in the UK. The government needs to encourage investment in high technology production methods – not just jobs

Council Tax on Unsold Properties

• Councils charge Council Tax on unsold new build properties when they have been completed for 6 months

• This policy is a major disincentive to developers to build in a difficult market

• This policy simply kicks the developer when he is already down.

Government should change the rules now to stop this unnecessary and unhelpful policy. Council tax should only be charged on first sale

• A 500 home scheme can easily cost £0.5M to get through planning and a 2000 home scheme £1.5M or more

• Councils are increasingly extracting money from developers wherever they can get it– Section 106 costs– Legal costs– Pre-planning costs

• Ability for statutory consultees (Natural England, Water Authorities, Environment Agency etc......) to derail the process at the 11th hour is significantly adding to developer costs

Wherever practical statutory consultees should only be allowed to have their say much earlier in the planning process

Planning Costs & Bureaucracy

Dog Walking in Chichester!

• Natural England objected to a ZeroC proposal to develop an army barracks in Chichester at the 11th hour due to the impact of dog walkers on Chichester Harbour 6 miles away!

• ZeroC had to pay Natural England £150K for dog wardens and the objection delayed planning by nearly 3 months

• Total cost to ZeroC was more than £0.25M!!

Uncertainty Over the RHI & FIT

• Developers need to identify their energy strategies for schemes often in excess of 2 years before starting to build

• ZeroC has built has built an entire development programme around biomass district heating

• Re-planning the energy strategy should the RHI falter would be a very expensive exercise

The government must commit to current and emerging renewables policies on at least a 4 year cycle. The building industry must be given time to respond to changes

Council Inconsistency

• There are too many different ways in which different councils interpret government policies on issues such as affordable housing, offsite contributions and design quality

• Local council’s frequently introduce policies that impact on scheme viability without a proper lead in

• The result is frustration/uncertainty for developers

All changes to policy that adversely impact on the cost of development should have a minimum of three to four year lead in

The National Planning Policy Framework sets out the Government’s requirements for the planning system only to the extent that it is relevant, proportionate and necessary to do so. It provides a framework within which local people and their accountable councils can produce their own distinctive local and neighbourhood plans, which reflect the needs and priorities of their communities.

Draft New National Planning Policy Framework - 2011

Land Supply• There is currently no shortage of land, just buyers– ZeroC is being offered good quality brownfield land on an

almost daily basis– National house builders have a good 2 years supply of

consented land with many more years in the current planning system

New National Planning Policy Framework is broadly welcomed but it must be more prescriptive on Councils to ensure developer cost certainty

Questions