The AJ talks to developers, clients and industry insiders about where the market is heading and what it means for architects
It took almost seven years for the construction industry to regain its confidence after the traumas of the 2007-2008 global crash – a downturn which had a profound impact on the profession.
After drying up completely, only in 2013 did commercial developers finally return to speculative development – a bellwether for a healthy sector – according to data released by property consultancy Savills in 2015.
However, in recent months, a nervousness has started to creep back in. Across the development sector, murmurs that things are slowing down have grown in volume. Gus Zogolovitch, director at developer Solidspace, sums up the mood: ‘This very much feels like 2007 all over again,’ he says.
But does any of the latest construction-related data back up this subdued sentiment? And if there is a new slowdown, for how long are architects likely to be affected?
Recently published statistics certainly point to a drop in construction activity. Figures from the Construction Products Association (CPA) show output in the commercial sector fell 1.6 per cent from April to May, with new orders dropping sharply since the vote for Brexit.
The downward trent is likely to speed up in 2018
Noble Francis, economics director at the CPA, tells the AJ: ‘The uncertainty post-referendum has impacted on new orders in sectors reliant on international high up-front investment for a long-term rate of return, which is, primarily, industrial factories and commercial offices.’
The downward trend is likely to speed up in 2018 as large projects are completed and not replaced at the same rate, Francis says.
Ian Fletcher, director of real estate policy at the British Property Federation agrees. He says: ‘Generally, at the moment, there is a bit of hesitation on the part of the sector.’
While strong demand from online retailers means speculative development is unabated in the distribution and warehouse sector, he says, development without the guarantee of a tenant has all but dried up in the office and retail sectors.
Fletcher adds: ‘After a long fallow period following 2007-2008, people had started to re-enter the market for speculative offices. However, there is now a lot of uncertainty about finding occupiers following the Brexit vote.’
This general market indecision is also perhaps to blame for the major drop in architects’ optimism reported by those taking part in the RIBA’s Future Trends survey.
The RIBA Future Trends Workload Index dropped from +23 points in May to +10 points in June. The RIBA says respondents blamed this dip in confidence on the ‘growing concern about macro-economic uncertainties [intensified] by the general election outcome and the start of Brexit negotiations, rather than a dramatic change in workloads or the level of project enquiries.’
People want to be building and selling before we exit the EU
Others are more optimistic about the short-term effect of Brexit on the development market. Jonathan Manns, director of planning at property consultancy Colliers International, says there is no sign of a drop in planning applications being submitted by developers.
‘People are looking to sweat assets which might have been on their books for a while,’ he says. ‘They want to be building and selling before we exit the EU.’
And yet, despite the housing crisis, the value of project starts in the residential sector has plateaued in the past year, according to figures from project tracker Glenigan. This tallies with figures from registration body NHBC, which shows a marginal 1 per cent decrease in homes registered between April and June compared with last year.
More solid evidence of a downturn came from Ballymore’s John Mulryan in June. Speaking at the London Real Estate Forum, he was reported as saying that the housing developer’s private sales in London had fallen 40 per cent year-on-year, and he warned that rising material costs and static prices had led to ‘less development’.
Even so, Allan Wilén, Glenigan’s economics director, says that these reports and figures do not yet illustrate a slump. ‘It is nothing dramatic, although we are expecting a bit more of a slowing over the next 18 months due to increased pressure on consumer spending,’ he says.
A number of experts across the sector cite the government’s Help to Buy initiative – which accounts for over one-third of new build home sales – as playing a key role in helping sustain the housing sector.
However, the recent announcement that the Department for Communities and Local Government has asked a team from the London School of Economics to evaluate the scheme has led to concerns that it might be closed early.
In past downturns, public sector funding has provided a lifeline for architects
In past downturns, public sector funding of this type has provided a lifeline for architects and their clients. As the private sector sat on its hands, the public sector spent billions on infrastructure and housing projects. But the continuing policy of austerity provides a radically different context this time round. ‘There are now minimum rations in the cupboard,’ says Andy Downey, partner at Elliott Wood Partnership.
The importance of public funding for housing and infrastructure in helping sustain development is reflected in the CPA’s forecasts. ‘Overall, we are forecasting growth of 0.7 per cent for construction output in 2018,’ says Francis, ‘But that is heavily dependent on infrastructure delivery and private housing growth offsetting falls in other sectors; so whether firms experience a slowdown or increase in work is dependent on which sector they are operating in.’
Glenigan’s figures show a 59 per cent drop in the value of starts in the health sector and double-digit year-on-year declines in education and community sectors.
There is some encouragement from an uplift in social housing starts – up nearly a quarter between February and April. However, Wilén adds: ‘Civil engineering starts were 23 per cent lower than a year ago, driven by a drop in infrastructure projects as the snap election pushed back the commissioning of public sector transport projects.’
Business representative groups such as London First are calling for quick decisions on projects such as the expansion of Heathrow Airport and the Crossrail 2 project.
‘Money is cheap, and the government should be borrowing to build things rather than just service the debt,’ Downey argues. ‘But these projects take a long time to get going and a long time to evolve. If you don’t start them soon then it could be too late.’
Most in the development sector agree that development is unlikely to get back on an even keel until the government provides a firmer idea on the shape of the UK’s departure from the European Union. ‘If we were to get strong clarity on what is happening Brexit-wise it would go a long way to quelling developer concerns,’ says Fletcher. ‘They are not in hunkering-down mode and there is an appetite to continue to invest.’
The sector, then, is spending the summer in a state of anticipation as it waits for ministers to return to their desks. And hoping that effective government strategy will be able to nip the current slowdown in the bud and prevent it turning into a full-blown slump. ‘This is perhaps the most important summer recess for a while,’ says Downey. ‘It won’t be until September or October when we will have a better idea of how this is all going to unfold.’
How are clients feeling? We spoke to
- Gus Zogolovitch, managing director, Inhabit Homes, a custom-build housing developer in London
- Paul Cook, managing director, Dukelease, a property developer focused on prime central London sites
- Paul Templeton of Baobab Developments, an emerging south coast-based developer
- Chris Thompson, managing director and founder, Citu, a Yorkshire-based sustainable housing developer
- Baerbel Schuett, development director, Londonewcastle, an established, London-based mixed-use developer
How, as developers, are you viewing the current market prospects?
Paul Cook ‘The industry is in the middle of a period of land value readjustment, which has reduced the pace of market activity. As a result, development is happening, but more slowly, as developers and investors weigh up whether to build out, sell, or, indeed, buy. One of the issues when transacting land purchases is how to address expectations on land value, and one possible answer is overage. This is therefore a recurring feature informing our strategy as we go forward.’
Paul Templeton ‘Momentum and the market have slowed considerably and the immediate outlook is just about sunnier than ‘bleak’. Just. Buyers’ confidence is low and this trickles up to us developers and we struggle to be positive about investing in anything other than sure-fire wins. This leads to conservatism in approach, which doesn’t make for exciting architecture, nor development. We are favouring a more mitigated and mixed offering – small units, mixed use – not having all of your eggs in one basket.’
Baerbel Schuett ‘We are not slowing down – what we have learned over the years is that every scheme needs to be considered carefully and, as long as it’s designed well, there will be demand, particularly in London. Any ill-designed schemes will struggle in more difficult economic climates. We look at new opportunities within changing markets.’
Gus Zogolovitch ‘I’ve seen the market slow down for about a year now. The clear signs are: lower auction sales activity, price reductions, lower asking prices and buyers being very cautious. The sentiment in the market has turned negative. We’re not slowing down on the things we’re building, but I have seen less competition in the marketplace.’
Chris Thompson ‘The fundamental demand for new, sustainable and urban housing is strong. So we’ve not slowed down any schemes, although the nature of what we’re doing requires that we check back to ensure that what we’re doing aligns with market demand. As a result, we try to stagger our planning work to reflect improvements or comments from previous phases.’
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What would you like the government to do for you both in the immediate future and in the longer term?
Paul Templeton ‘I would dearly love the government to repeal the Stamp Duty increase, as it has become prohibitive for purchasers. It is great that it is relaxed at the more modest end of the market but, at the top, Stamp Duty rates of 11 to 12 per cent are stopping people purchasing. I dare say, it would apply brakes in times of plenty – but in these more straitened times, it is an impediment to progress. I’d also like the government to take a long look at the planning process and sort that out, as it is not fit for purpose. We had a beautiful five-unit John Pardey Scheme in Lewes earmarked for an ugly second hand car lot, but we were mired in planning for two years [It was approved this month – News Editor]. How is this possible? Or permissible?’
Baerbel Schuett ‘Provide more certainty. This pertains to a whole range of things: more certainty around planning processes; more certainty around Brexit regarding EU citizens, materials imports and so on – the list is endless.’
Paul Cook ‘Remove as many obstacles to delivering supply as possible. The government has to draw on the property industry’s expertise to deliver a system that’s fit for use and make it possible to quickly and effectively deliver high-quality housing. Even with interest rates remaining so low, the private sector can only invest so much, so councils need to start building, too. Collaborating across boroughs is imperative, regardless of the politics involved. At the local level, the production of local plans need to be freed up and become more efficient. We need to look at how we can design, approve and deliver infrastructure in a more timely manner, as well as support existing projects, such as Crossrail 2, which have the potential to open up development opportunities on a regional scale well before they are in operation.’
Is there anything you’d like architects to do – or to do differently – for you at this time?
Paul Cook ‘As developers, we are having to be more flexible in our strategy and thinking in order to creatively address the current market needs and obstacles – even on projects where we already have planning approval, which are being revisited. In turn, we need our architects to start thinking the same way without being too precious about their original work and their preferred mode of working.’
Paul Templeton ‘We are looking for that design excellence and eye for value engineering to enable us to deliver high-quality design but at more chastened prices.’
Architects need to think entrepreneurially
Baerbel Schuett ‘Take more responsibility. The design process is being broken down into so many different disciplines. Architects no longer deal with, for example, the detail of a façade design – most firms now request a façade specialist, due to the complexity of Building Regulations. The same goes for access – architects need a specialist access consultant to confirm that they comply with the relevant building regulations. There are other areas where more and more disciplines are added, which just adds to the complexity, rather than simplifies.’
Gus Zogolovitch ‘Architects need to think entrepreneurially – to go out and find sites and find developers to work with on those sites. Don’t wait for the commission – use your expertise to solve problems in design and then bring developers on board who are experts in solving problems like funding and pulling the project together.’
How have the vote for Brexit and the general election result affected your business?
Paul Cook ‘They have definitely created a period of extreme uncertainty whose full effects we haven’t yet felt. At the moment it seems foolish to try and make definitive predictions about the direction of travel in politics and the economy. The market slowdown means we are reassessing our options on a couple of prime central London sites. However, it’s not all doom and gloom. During this time, we have built out and taken to market Artisan in Fitzrovia and Beau House in St James’s, and obtained planning consent on Panther House in Camden.
Paul Templeton ‘The election and Brexit have been disastrous for us, let alone the country at large. Property markets need confidence in the future to thrive, and I am not sure there is a single person in the country who has that.’
Chris Thompson ‘Brexit has clearly created a load of uncertainty for everyone. The weakened pound is hitting many of our material costs, but the true impacts are as yet unknown and will, in all probability, impact in ways that are not commonly pre-empted today.’
It’s impossible to predict where the market will be in the next year
What are your predictions for the year ahead, both for yourselves and for the development market generally?
Paul Cook ‘Uncertainty levels are so high at the moment that it is impossible to predict where the market will be in the next year. As a company, we are going to continue to plough on with our current projects and maintain a flexible approach, so that we are prepared for all outcomes.’
Gus Zogolovitch ‘I’m cautiously positive. We are differentiated in the market, as we design for owner-occupiers, self-builders and custom builders. It’s when markets turn down that people are prepared to work with innovative models. We find ways for people to save up to 30 per cent of the cost of a normal home – and that is proving popular.’
Chris Thompson ‘We have, perhaps, the most rewarding year ahead of us, as we’ve recently launched various new delivery teams and off-site assembly initiatives that have been in planning for a couple of years. Elsewhere in the industry there will be significant investment in the North, where international money is looking for a home – particularly now, given the weakness of the pound. This will likely put pressure on land values and density assumptions, so cities will need to ensure projects still deliver the right placemaking and sustainability ambitions.’