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Print articleVibrant, versatile, and valuable
December, 2022 - Shoosmiths LLP
It’s the land, stupid!
Could a land value tax to unlock property (and house) market problems of high house prices and rents, boom and bust cycles, lack of availability, and underused land?
Maybe not – at the supply side starting blocks, strategic land promotion, we have seen (and continue to see) very high land price expectations from landowners and their agents, as the cost of unlocking land for development. Taken also with spiralling construction costs, that leaves developers and investors as the squeezed middle on margin – so something has to give. With house prices tailing off and sales volumes falling back because of external economic effects, a land value tax has the feeling of being a tax for waiting, and not something that drives delivery.
Maybe what’s actually needed is a better alignment of expectations throughout the demand chain, so that landowners are rewarded in time for successful development, not just for being the only (land) show in town. Are we going to see national and regional development agencies stepping in to unlock land in areas of need, and partnering with developers to bring forward schemes in those areas, built using tax increment financing, giving people proper payment for success?
Please turn off the lights when you leave
Energy costs are now a massive challenge to the sector – both in the costs of provision, and for end users. Whoever thought that developers would struggle to secure connections for new schemes, or that “warm banks” would be one of the phrases of the year for dictionaries? Whole life carbon costs are now becoming a common topic of discussion, and it can only be a matter of time before they figure routinely in development and investment appraisals – particularly as ESG backed finance and sustainability-linked lending wraps further around the sector.
District heating systems are back on the agenda for new schemes, as is integrated solar as a regular offer to the institutional buyers, and just now we are seeing significant funding offered to homeowners to improve insultation. But, actually, many institutional landowners have seen the importance of ‘fabric first’ to address energy costs – fix the supply side of course, but there’s a lot to be said for making housing less leaky in the first place. Don’t forget that Registered Providers (RP) have been saying for some years that there’s a huge amount of catching up needed on existing housing stock to address these historical problems, and there must be a place in the world of infrastructure finance to play into this requirement.
I have a cunning plan…
Planning has been very much to the fore this year – we can’t ignore the impact of biodiversity net gain and nutrient neutrality challenges to delivery, and now Hillside has given (welcome but actually unhelpful) judicial guidance on managing drop in planning permissions. These issues all have to be at the forefront of developers’ thinking in the coming year, and we are already seeing a growing market in SANG and BNG land deals to support larger scale development.
Planning reform is increasingly in the press, and the recent furore over housing supply management is going to rumble on for a while yet. We encourage developers and investors in the Living sector to stay involved in the debate; it’s your land that this will affect, and planning policy is undeniably strategically important to sector success.
Rules, rules, rules
Legal developments have been many and varied this year, impacting across the sector. Ground rents are still gone (albeit the tidying up required within the sector around historical ground rents continues apace), and section 21 reform is following, though Commonhold seems to be about as popular as it always was. There was a strong view under the previous administration (or the one before the last one, they seem to come and go quite quickly at the moment), that generation rent should be aspiring to be generation buy, which was pretty blind to the different demographics of these market segments, although some valuable steps have also been taken to rebalance the rights of landlord and tenants.
Probably the one piece of law that everyone in the sector is thinking about is the Building Safety Act. Our construction team is actively involved in advising clients on the roll out of the Act, including developers, contractors and funders. That work is likely to continue for the foreseeable future, as process and practice evolves to accommodate the changes for sector stakeholders.
And the institutional landlords?
We see that the ‘professional landowners’ – BTR, PBSA, and Registered Providers – are very much in the ascendancy, and this is something certain to continue into 2023.
Recent reports suggested that £3.2 billion of capital has been committed to the UK BTR sector in the first three quarters of 2022, an increase of 10% year on year. Global figures for Registered Providers are available to March 2021 and, despite showing a 20% decrease year on year, still reveal that investment in new supply was £10.9bn and total spend on maintenance and repairs was £5.4bn. These are not figures to be sneezed at – the institutional landowners are financially major players, and the Registered Providers are becoming increasingly proficient at raising finance through the bond issuance as well as traditional debt markets. PBSA is also powering through, and many major towns and cities now are seeing the benefits that large scale investment in student accommodation can bring for their universities. These sector participants are massively important for community building and regeneration.
MMC, take a bow
We couldn’t finish a review of the year without acknowledging the impact of Modern Methods of Construction (MMC). This has become very important and is really stepping into the spotlight now. MMC is now embedded as a valuable route to scale and pace of delivery. It’s not without its challenges, including supply chain and skillset management, but MMC is clearly a desirable and developing delivery vehicle for addressing the housing crisis. At the time of writing this, L&G have just announced a 1,000-unit deal with a major south of England RP - this indicates the extent to which the sector has embraced the technology to drive housing delivery.
The future looks positive
The future is bright for the Living sector, and it is definitely one where developers and investors should “watch this space”. Across the piece of “anything with a bed”, sector stakeholders include some of the most forward thinking, innovative and ambitious organisations and individuals. It’s their verve that makes the sector such an exciting place to work, helping to deliver social and financial value to investors and developers, and helping to drive community building at its best.
2023 – let’s do it!
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