Residential development companies borne out of housing associations are pioneering a model many have called for
When Sajid Javid presented his White Paper, “Fixing our broken housing market”, to parliament in February 2017 he recognised that the very structure of the housing market makes it harder to increase supply. In particular, he made the point that a handful of very large private sector companies were responsible for around 60% of all new private homes.
Although not in itself a bad thing in terms of economy of scale the very model that they, without exception, operate – a single-trader, mono-tenure model – fundamentally acts as a barrier to significantly increasing supply. Oliver Letwin in his “Independent review of build out” succinctly points out that a housebuilder’s business model relies on a build-out rate that is dictated by a local absorption rate that will not impact on market price (were it to do so their model would be fundamentally flawed), therefore this tends to slow down rather than speed up build-out rates.
A single-trader, mono-tenure model – fundamentally acts as a barrier to significantly increasing supply
The conclusion of Letwin was to say that if major housebuilders (or others) were to offer housing of more varying types, design and tenures the overall absorption rate could be substantially increased. These different tenure groups will potentially have a two-fold impact on the value of the land as well as the margin return. Both of which would significantly change the business model of the housebuilder.
Trying to adjust land values to recognise a more blended tenure mix is not a short-term fix, without specific planning intervention. Landowners will be loth to take a writedown in land value based on a proposition that chooses to provide a more balanced approach to product and tenure. Only a change in planning policy is likely to convince them of their new land value.
Trying to adjust land values to recognise a more blended tenure mix is not a short-term fix, without specific planning intervention
Rental and intermediate tenures, if weighted too much into the development, will not provide the housebuilder with the return that has become expected by the City. It could be argued that for them the risk associated with these predominantly pre-sold products is vastly diminished, however, the housebuilders are reluctant to accept this, particularly at a time when resource – both management and trade – is scarce and they are looking to maximise return from this limitation.
This provides a context to a residential sector that has struggled to increase significantly the amount of housing over the last few decades.
Residential development companies borne out of housing associations predominantly look to deliver a much more blended product and tenure range
I believe however that the fundamental structural change that Sajid Javid refers to and which Oliver Letwin defaults to is actually happening at pace. Not through the traditional housebuilder but through the new breed of residential development companies borne out of housing associations. The structural change builds from the growing influence and impact of these companies on residential development and delivery:
- Their models predominantly look to deliver a much more blended product and tenure range, typically 50% affordable, 25% intermediate and 25% open market
- They have longer-term business plans that can react to changing market conditions
- A substantial amount of their build programme is counter-cyclical
- They have patient money that looks for returns over a much longer period than the housebuilder model
- They do not answer to the City and therefore are not pushed into counterintuitive actions
- The returns and surpluses they make are pumped back into housing and not lost to shareholders
- They have a long-term financial and social interest in the assets that they are creating which encourages investment in a different way; and finally,
- The government can channel funding through these bodies without fear that it ends up as big bonus pay-outs for private sector bosses (see the recent furore around Jeff Fairburn at Persimmon).
All of these things are structurally changing the residential sector, which is likely to accelerate as these organisations gain more scale and maturity.
In addition, we are seeing the impact that these new development organisations are having on the collaborative working environment and the engagement models. Their need to attract private sector skills has created the need for joint ventures and a totally different way for the strategic residential players to engage with each other. The sharing of skills, knowledge, resource and return has been a revelation for the sector, driving a significantly new delivery environment.
The sharing of skills, knowledge, resource and return has been a revelation for the sector, driving a significantly new delivery environment
The White Paper highlighted the poor performance in construction productivity over the last 25 years, 11% improvement against the general economy improvement of 40%. It has long been recognised that construction is a very inefficient sector requiring significant investment in research and development if it is to improve. Again, in areas such as modern methods of construction the traditional housebuilder model has been a barrier, a constraint on the innovative thinking and more importantly investment required to drive this initiative forward.
These new development organisations, supported by the government, do have the model, the will and necessary financial headroom to pioneer the big ideas around smart homes and provide, yet again, another major strand to the structural change that Sajid envisaged.
Source: By Richard Jones, Housing Today.
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