Covid-19 Daily Briefing

Daily briefings on the most relevant news affecting our industry from the past 24 hours.

Real estate will play a central role in capturing the potential of UK life sciences

UK life sciences may be the perfect coronavirus cure for the UK economy, but real estate must be on hand to support the science.
ilke Homes - Modular Housing

Innovation will be key to getting Britain building again

Covid-19 is an opportunity to bring UK housebuilding into the 21st century.

How modular manufacturing can provide new jobs in the wake of retail’s demise

With retail jobs disappearing by the tens of thousands, perhaps modern manufacturing can pave the way for a new-look workforce.

Tackling the Housing Crisis

How do you solve a problem like the UK’s housing crisis? Blackstock Consulting sat down with a host of industry experts to discuss exactly that.

Modular housing has the potential to play a crucial role in delivering the homes needed to meet the government’s ambitious 300,000 homes a year target.

Speeding up delivery will be essential to meeting these targets, and given that offsite manufacturing, on average, delivers homes twice as fast as traditional construction, many in the sector believe it will have a major role to play in tackling the housing crisis.

But if modular is going to deliver on its promise and secure the necessary investment and gain public trust, educating investors, policy-makers, local authorities and consumers will be crucial.

Tackling the negative connotations attached to prefabs which continue to tarnish modular’s reputation will be a crucial first step, both from both an investor and consumer perspective. A unified message from the sector will be fundamental to achieving this.

“We need a feedback programme to build demand for the modular product, and I think that in itself will generate capacity and give businesses the confidence to build new factories across the country,” says Val Bagnall, managing director of Apex Airspace, a modular housing provider.

Consumer confidence in modular homes will be based on its build and design quality, according to Michela Hancock, managing director of construction and development at property developer, investor and manager Greystar UK.

“People don’t necessarily know, nor do they care if their home is a modular product. What they do care about is the quality of the product and if it’s sustainable and well-run,” she said.

Dave Sheridan, executive chairman of off-site manufacturer ilke Homes, believes this flexibility does not negatively impact design quality.

“Modular doesn’t just have to be for the entry-point house, it can be designed to be aesthetically pleasing. You can dress a modular product to be extremely attractive.”

However, more support will need to be seen at the local level according to Andrew Prickett, UK Head of Residential at Faithful+Gould and Tony Dicarlo, Developer and Investor at innerspace Homes if modular is to achieve its full potential.

The last housing minister Kit Malthouse and housing secretary James Brokenshire both backed offsite construction during their tenures. Indeed Malthouse said of the 750 home deal between ilke Homes and Places for People that it showed the UK blazing “a trail in the modern methods of construction that are transforming home building.”

However, convincing local authorities to embrace modern methods of construction is proving more difficult.

“At the central government level, offfsite and modular is hugely supported – they are really backing it, but that’s not filtering down to local government and definitely not the planning system where it is not even in the National Planning Policy Framework” Tony DiCarlo, founder of modular house builder Innerspace says.

Andrew Prickett, director, UK head of residential at project and programme management consultancy Faithful and Gould, suggests that access to land and scaling up pilot schemes would be a step towards accelerating the widespread adoption of modular and offsite.

“Let’s back SMEs, new thinkers and innovation and let’s scale up. Instead of smaller pilot schemes, we should think more ambitiously and consider 200 to 300 homes developments,” he says.

“We could have a pre-assumption that new council houses are built using this technology unless there is a watertight business case for not doing it,” he adds.

In her first speech as Housing Minister at RESI 2019, Esther McVey made it clear that encouraging home-ownership was a clear priority. But how will first time buyers be helped onto the housing ladder now that Help to Buy is being scrapped? 

The harsh reality is that is not a one size fits all solution to the problem.

“Help to Buy was born out of the post-recession world and has since gone from being a safety net to a jetpack for profits at some of Britain’s biggest housebuilders. Rescuing firms was the number one aim of the scheme with little thought being given to when the market eventually stabilises,” says Adam Challis, head of living research and strategy at JLL. 

Vanessa Hale, director of research at BNP Paribas Real Estate and chair of Urban Land Institute (ULI), agrees with Challis, but praises some companies who are actively seeking to diversify.

“HTB certainly has a political slant that we’re going to have a hard time getting away from, but housebuilders, such as Telford, who have been moving towards increasing their proportion of build-to-rent homes, are looking towards solutions.”

Telford Homes, which recently entered two build-to-rent partnerships with asset manager M&G Real Estate and Invesco, accelerated its shift towards the build-to-rent sector last year, accounting for 70 per cent of the company’s development pipeline.

During the discussion, panel experts shared the consensus that there isn’t going to be a ‘one size fits all’ solution to life after HTB.

“A one size fits all approach will fail. What the market needs going forward is a range of products such as build-to-rent and shared ownership”, says Challis.

Mergers, modernisation and a focus on expanding shared ownership are helping housing associations take centre stage in fighting Britain’s housing crisis. There is a huge opportunity for joint ventures and collaboration with the private sector.  Yet according to two leading G15 members and the head of the sector’s trade body, there is still a huge shortfall in grant funding needed to provide adequate quantities of social housing.

Tackling this will require  more funding, strategic partnerships, and a cohesive, long-term investment strategy from the government. 

According to the National Housing Federation (NHF) , housing associations are receiving roughly just a tenth of the grant funding needed, with the government spending just £1.27bn on affordable housing, making housing one of the smallest government budgets

“What we need is a long term investment package from the Government. We were asking for £12.8 billion a year. It’s a lot of money, but it means we could deliver 145,000 affordable homes each year which we know we need over the next decade,” says  Kate Henderson, CEO of the NHF.

“Our research shows we need around 90,000 social rented homes each year. Last year we built 6,000. We are an incredibly wealthy nation but some people’s housing needs simply won’t be met by the market alone,” she adds.

Alan Strickland, director of external affairs and resident involvement at Optivo, agrees that more government support will be crucial.

“The government needs to continue investing in social rent, and it’s absolutely critical that people can continue to have a home they can afford. Fundamentally, both on affordable homes for rent and for sale, housing associations totally stand ready to help, to invest, to build and to work with communities.”

Shared ownership is one crucial tool that housing associations can promote to boost home-ownership. Fundamentally, this method means that even with increasing property prices, people on an average salary will have a chance to be able to afford a home. 

“We have a big development pipeline with shared ownership and we’ve been doing it since the 80s. It’s a hugely resilient product, it is the most affordable way that people can get onto the housing ladder.If you’ve got a £500,000 property, then £125,000 is the equity share that you can buy. All in all, you’ve got people who are on about £35,000, and they can afford to buy there. So it is affordable – it’s the only way a lot of people can live in London”, Geeta Nanda, chief executive of Metropolitan Thames Valley, explains. 

To listen to more of PropCast, Blackstock Consulting’s podcast series which focuses on relevant industry topics with top professionals in the space, subscribe to our podcast via Apple Podcasts, Spotify or SoundCloud.

Planet Property’s need to be green

A man dressed as a broccoli arrested on the streets of London and people glueing themselves to tube trains before getting a good shoeing in Canning Town can only mean that the Extinction Rebellion are back in town.

The merits of these protests can be debated endlessly.

But it is becoming increasingly accepted by both business and politicians that climate change must be taken seriously.

Clearly, property must play its part given that the built environment is responsible for roughly 40 percent of the UK’s total carbon footprint, according to the UK Green Building Council.

However, while property may often be maligned for being an old fashioned club of chaps in blue suits, real estate is increasingly becoming aware of its responsibility as an industry to implement changes to tackle climate change.

In September, 23 property companies with a total of over £300bn of assets under management signed up to a climate change commitment, launched by the Better Buildings Partnership, requiring them to pledge that their portfolios will be net zero carbon by 2050, and that they reveal how they intend to reach that target.

 There are business reasons for investors and developers to look towards backing green projects. One, it reduces the risk of being exposed to stranded assets as the UK and global economy shifts towards this being the norm.

And, two, increasing numbers of investors are making it clear they will not put their money into vehicles that back projects that are harmful to our environment. This is becoming more than just a fashion for a small minority. It’s a clear and swelling trend.

Less polluting buildings, whether homes or offices or factories, will improve our air. Recent studies have shown that air pollution is killing as many Brits as smoking does a year. And of course, these pollutants in the air exacerbate conditions like asthma, adding stress to our already under pressure NHS with research showing 1,000 London hospital admissions a year due to asthma and other lung conditions caused by poor air, for example.

The benefits of a greener built environment are not just restricted to our health. More efficient homes will cut household bills, which in turn will increase their spending capacity. That’s good news for our economy.

But it’s not only in new builds where we need to see a push for green. Many of our older buildings are gas guzzlers, and an immediate and sensible step the government could take would be to eradicate VAT charges on refurbishment, much like the French have.

This would encourage investment appetite for refurbishment and help us start to fully decarbonise our building stock.

Design must also play its part.

Leading voices in the architectural world have acknowledged this fact, with Assael Architecture becoming the UK’s first practice to adopt the UN’s Climate Neutral Now Initiative. Through the initiative, Assael must now calculate and disclose its current carbon footprint, including international air travel, showing a clear pathway to reducing it year-on-year.

Architecture can also be a powerful tool towards building a sustainable future. Through the use of natural materials like timber and cork, as well as the use of greenery in developments, new buildings can absorb much of the greenhouse gasses that we produce, radically reducing our emissions and helping us to live healthier lives. Greener architecture has also proved itself to be a future proof investment, with green homes becoming quite the status symbol.

It’s clear that the property industry has in fact made a number of significant strides in the right direction. We have the means and motivation to transform the built environment in the UK and the way it operates, but now has to be the time to seize this opportunity.

Paying for the long term BTR model

One of the biggest advantages yet biggest barriers of Build to Rent (BTR) is that developers and operators take the long-term view.

They don’t build and walk away, like a traditional house builder, and as a result there are a lot more happy tenants, and happy local authorities.

But this structure has a massive impact on business practice and it’s a lot more expensive up front. While other investors look to trade at different stages of the asset’s life cycle, a BTR fund aims to hold for long-term income.

That means, from day one, income needs to maximised and costs streamlined, because it’s so much more expensive to build.

Traditionally, to make returns stack up, operators have had to take on development risk, which has in turn led to problems around finance. Typically banks will only lend on permitted schemes and are increasingly being discouraged from risk by regulators. Likewise many institutions will only touch stabilised assets.

But buoyed by the fundamentals of the market and by the positive political support, the signs are more positive right now.

And appropriate explanation, planning and development of that long-term development model can also go a long way to encouraging lenders: essentially by showing a greater focus on what happens post development.

This means, practically, ensuring the scheme is in the right location and has the right attributes for the rental market. It also means focusing on the operator is and what the gross-to-net margins look like. There will be considerations around amenity and layout, but also the building materials used and their longevity.

It also means more focus on the assumptions of development: assumed rents and how they compare to the local market average, and gross to net leakage, which is generally considered to be at least 30% – are the most important.

For management, it means seeing if a sinking fund has already been set up, to ensure buildings remain as good as they are on day one, and how the operation of the building has been planned, whether with an in house or external agent.

The more a developer operator can show it has been thinking about this now, and importantly making realistic assumptions, the easier it will be for a lender to stump up the cash.

It’s a long-term investment, which means we should already have long term plans. Simple, no?

The local authority potential for Build to Rent

We should not be ashamed of the fact Britain is reliant on private finance to deliver new infrastructure. And there’s no reason why we should not use partnerships with the private sector to build thousands of Build to Rent (BTR) homes.

From major projects like the Thames Tideway scheme and airport expansion to new schools and hospitals made possible through PFI, state spending is subsidised by business.

Housing is no different.

Since the 1980s, governments have almost entirely depended on the private sector to deliver public policy. But Britain’s continued failure to build enough homes has led to calls for a rethink.

While local authorities now lack the resources needed for a programme of mass house building like we saw in the 1950s and 60s – even with changes to borrowing – there are other ways the public sector can help.

It remains one of the largest landowners in the country and organisations like the NHS and MoD possess the kind of brownfield sites successive governments have long prioritised for development.

With the public coffers under renewed pressure, renting could provide long- term income streams enabling public bodies to generate cash flow, without selling off the family silver.

The first steps were taken by the coalition government, which introduced the Infrastructure Act 2015, giving the Homes and Communities Agency additional powers to speed up the release of surplus public land. By 2016, 899 sites had been released – enough to build over 100,000 new homes.

More could be done but this will require initiatives from both the public and private sectors.

Firstly, central government must ensure all its departments adopt a modern view of “best value”. This means having proper reports and valuations from consultants and experts on how best to approach the disposal of public land. This will allow them to realise and demonstrate the wider benefits of any disposal.

Some local authorities have already taken the initiative. In Manchester, rather than taking a one-off approach, the city council has pooled together money from the DCLG and local pension fund to create a joint venture focused on housing.

But the solution is never just simply copying a model others have implemented.

Local authorities should be adventurous if they want to close the funding gap. Devolution offers more opportunities than ever before to be more creative in thinking and planning in this area – let us hope they seize them.

Blackstock’s 18 for ‘18: A review

Last year, the Blackstock team put forward some predictions for how 2018 would play out. Let’s see if we were right: