What will make developers push the button?
With the construction industry needing a boost, leading developers identify the financial and planning conditions they need to start building again, reports Richard Waite
Developers are still failing to get schemes off the ground. New figures released this week prove that despite government attempts to kickstart the construction industry, the sector continues to struggle.
Although the coalition has set drastic planning reform in its sights and introduced supported mortgage schemes like New Buy, industry tracker Glenigan reported this week that the value of the projects on hold in the UK actually rose from £577 million in August to £729 million in September.
The latest Construction Market Survey from the Royal Institution of Chartered Surveyors (RICS) also showed that overall building levels had fallen in the three months to September, with both public and private house building dropping during the last quarter.
There has been a fundamental change in the way banks measure risk
A RICS spokesman said: ‘Construction has now failed to see any significant growth in almost five years and the industry will be hoping that the recently announced £50 billion stimulus package will go some way to boosting badly needed development.’
David Barnett, chief executive officer at Londonewcastle, agreed that the lack of funding remained central to the lack of developer progress. He said: ‘The banks are still recovering and there has been a fundamental change in the way they measure risk. Added to this, there’s the whole issue of pre-sales, which increases pressure on volume and not on achieving and driving values.
‘The loss, or indeed cost, of equity and bank lending combined puts further pressure on returns which, in turn, jeopardises project viability.’
Developers like Urban Splash, which recently posted pre-tax losses of £9.3 million and debts of £234.4 million in its latest accounts, are now looking at alternative funding models and potential rethinks to bring long-stalled schemes forward.
The AJ understands the developer is reworking elements of its much-delayed Tribeca housing scheme in Liverpool, with apartment buildings designed by Alison Brooks Architects reconfigured as student accommodation. It is also mooting building one-off houses by top-name architects rather than focusing on its usual, harder-to-fund, mainstay of larger-scale, residential projects.
Urban Splash director, Tom Bloxham (see below) also says the government must help those building homes for the private rental sector – a shift that should be underpinned by tax breaks.
Architect-come-developer Roger Zogolovitch believes there should be a genuine deregulation of all planning controls, allowing the conversion of existing buildings to any other use as long schemes are completed and occupied within two years.
Meanwhile, with cash unlikely to emerge from UK banks in the near future, Peel’s Richard Mawdsley is looking overseas – namely to the Chinese government – for finance to kickstart its huge developments in Liverpool.
The developers’ viewpoint
Tom Bloxham, Urban Splash
The public sector has to be more innovative in how it uses assets and finances projects, such as taking long-term leases on property.
Things have been very hard since 2008 and architects and developers have borne the brunt of the pain. It has been difficult to do anything outside the capital, especially for developers like us with real ambition.
The best thing the government could do, as well as helping with stamp duty to aid the mortgage markets, is to guarantee tax breaks for the private rented sector. People can’t afford to buy, so making it attractive for institutions would make a huge difference.
The missing element of most [stalled] schemes is funding
The missing element of most [stalled] schemes is funding. This is often based on end-users, so getting a public or strong private sector covenant to commit to a scheme for a long period makes it much easier to fund. You are not going to see a scheme on the scale of Fort Dunlop being built speculatively for many years.
You need to get the viability right, but that is increasingly hard outside the south east – even then you still have to fund it. So we are looking at different models, such as renting out apartments rather than selling them. We are also looking at a different type of student housing – not making places to cram a load of bodies in, but designing and building better accommodation to attract young people to the country.
Developers will make things happen through funding relationships with new partners and by collaborating with long-term investors. The public sector also has to be more innovative in how it uses assets and finances schemes, such as taking long-term leases on property.
Urban Splash has changed the way flats look over the last 20 years but new-build housing hasn’t changed much. We’d like to look at housing typologies next. Many people looking to buy a house don’t even consider a new-build; they are always looking to buy Victorian or Georgian. There are financial reasons for wanting to change. With schemes like, say, Timber Wharf, you have to build all 200 flats before you move the first person in; if you build houses, you just build a row or maybe even just a one-off.
There is real scope for architectural intervention in the house type and building great housing with great designers is an ambition of ours. I admire companies like Alessi, which have worked with designers to make beautiful, commercial products. We’d love to do something similar with the house.
Roger Zogolovitch of solidspace and lake estates
We’ve just started two new houses in north London with Stephen Taylor as our collaborating architect, but they have been delayed by every possible bureaucracy and banking covenant, insurance and contractual issue. We persuaded each particular bureaucrat that all was well and finally the construction of two houses of 150m2 has started (Solidspace pictured).
‘We must accept we have an emergency; we should provide crisis management until we regain momentum’
There is a disproportionate insistence by banks and all other relevant authorities to investigate every corner of a project from a risk perspective. We support appropriate risk analysis, but making buildings has always meant risk and reward. Colleagues seem to have forgotten the nature of risk in the delivery of development and pass it all on to the contractor or the professional team via ‘risk transfer’.
At the other end of the scale, we sponsored Exyzt to construct a temporary installation on our site at 100 Union Street. It is more direct and an interesting experiment in making a project from start to finish within six months, contrasting with our two houses which have taken six years to date.
The government regularly pronounces deregulation and suggests relaxing planning rules; nothing materialises. We watch as each pronouncement meets a tsunami of resistance from industry and NIMBYs alike.
In Japan 1.2 million homes are built a year but in the UK we struggle to build less than 10 per cent of that. And in Japan they have conquered the fear that greater volume and less planning control results in poor design.
To move from stasis to action we must build housing. We must accept we have an emergency and provide crisis management until we regain momentum. We need to deregulate all planning controls over replacing existing buildings as long as they are completed and occupied within two years. The envelope of the existing building could be extended by 20 per cent but all would have to be building regulation compliant.
Let’s stop tinkering and start working on a war footing.
Richard Mawdsley, development manager at Peel
We have 20,000 hectares of land and 70 projects, but very few are on site. We’ve been hit as hard by the financial downturn as anybody and we aren’t as active as we would like to be.
The UK is still dominated by London and the south east. Our Ocean Gateway [Wirral Waters and Liverpool Waters] is similar in scale to the Thames Gateway, which received lots of benefits. We need a bit of that and we need partners to help us. We have a lot of sceptics but a good delivery record.
We want to create a waterfront that is immediately recognisable, but it will take 30 years and in that time we may well go through three recessions and four changes of government.
The UK banks still aren’t lending to us
The area has been given Enterprise Zone status and the international trade centre could be a major catalyst. We are also inviting Chinese and Brazilian manufacturers to set up permanent showrooms here. We need financial support from China because the UK banks still aren’t lending to us.
Every scheme relies on money so the government needs to put pressure on the banks if it wants to see growth.
Interestingly, we have found that with local authorities having laid off those in planning, as well as development staff, those that are left are more efficient and want to get things off their desks.