Budget 2020: what’s the outlook for real estate?

Blackstock Consulting's clients' share their analysis of what the new budget means for the property industry.

It’s time for the Conservatives to put on their hard hats in the North

Infrastructure investment is the key to unlocking Britain's regions, and driving growth beyond the South East.

Car-free cities can help tackle climate change

It's time the property industry embraced the benefits of car-free cities

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.

What we can learn from Uber

In recent months, Uber has become a poster child – some would say scapegoat – for many things: zero hours contracts, below minimum wage pay, no job perks and claims of harassment. Last week’s astonishing decision by TfL, London’s transport regulator, to effectively ban it by removing its license shocked the millions who use it daily.

Much has been written already about this, but I’d like to start by making clear that I am, like most people, a regular Uber user. And despite my personal experience being inconsistent at best and downright terrible at worst, ride sharing in London has a vital role to play and should not be banned.

Was it a case of The Unions versus Capitalist Inc? No, not really, as one of the unions that’s been fighting Uber in the courts for drivers’ rights to claim ‘employee’ status has given the firm its backing. Was it a political stab by London mayor Sadiq Khan (who oversees TfL) against his former political rival George Osborne, the former chancellor, current Evening Standard editor and advisor to Blackrock, one of Uber’s investors? Not primarily, but I don’t doubt it crossed his mind.

This was my initial response to the story at the BBC while I was in Leeds as it broke last Friday.

TfL says it was about regulation – or more specifically, Uber’s failure to comply with it. And while there’s doubtlessly been huge dollops of spin spewed out by both sides, there’s no denying that Uber’s failure to control its reputation has played a large hand in this.

While some have dressed this saga up as an ‘attack on capitalism by a backward transport regulator’ or similar, it is more an attack on the corporate values of Uber – a company which, in disrupting an old-fashioned industry, has appeared to have little regard for many things people often hold dear.

If we’re honest, any business employing 40,000 or so people will have elements of criminal activity in the ranks. And let’s not pretend that out of the many thousands of licenced and unlicenced minicab drivers in Britain there have not been dozens of regrettable incidents over the years. In that regard, many have said Uber is being held to a higher standard that its peers. This ignores the point that it should be held to a higher standard.

You cannot claim to be “disrupting” an industry, using technology to enhance a sector, and then complain when the bar is raised. There’s no doubt that Uber’s technology – while easily replicated, as it has been in many cities – offers a host of safety benefits, from real-time GPS tracking to the rating and logging of trips. But this only amplifies the degree to which Uber could, and should, have been wholly transparent on any issue of corporate governance.

Reports that incidents which occurred after jobs had finished going unreported to TfL by Uber, if true, are unacceptable. And this letter from a senior policeman claiming the firm failed to report sex attacks seems pretty irrefutable.

If this stuff had happened at a start-up hotel chain or on an airline, what would the response have been? In many respects, neither types of service are as vital to London as Uber has become. For many millennials and students, who never previously would have taken cabs, the concept of a night bus is alien. The irony of course is that with London’s night Tube and a vastly enhanced bus service, public transit in London has never been more accessible, shaming cities like San Francisco and LA.

While I don’t plan to rekindle the whole debate around zero hours contracts (which admittedly work for some people fine, but which are unfair to others) or slave labour (something you could level at councils for how we pay care workers as much as taxi drivers), what’s clear is that the public employs a huge amount of double standards when it comes to its wallet.

What’s clear is that consumers are pretty hypocritical. Would people be as outraged if it wasn’t going to hurt their pocket? No, of course not. Do companies all support sustainability, going green, saving the world and doing the right thing? “Yes, provided it doesn’t cost more,” is all too often the response.

We saw similar – although far more short-lived – outrage when BBC’s Panorama show called out Marks & Spencer for having kids make its clothes in Turkey. Yet, do people think that garments bought from any clothing retailer for £10 or £20 could have been made with anything resembling fair pay? No, of course not. Yet it’s easy to turn a blind eye. People should be honest about the fact that, in fashion, you cannot have speed to market, competitively priced goods and fair pay in Britain. You can only have two. Do people care as long as they can pick up £5 t-shirts? No, of course not. No more than they do about picking up a £9 Uber ride from Oxford Circus to Camden when a black cab would cost double.

KPMG, one of the world’s biggest professional service businesses, has been caught up in the growing scandal in South Africa, firing its top people in the region over the Gupta fallout. The firm acted decisively, unequivocally putting its hands up. KPMG did the right thing.

Uber, in its short life, has become just as prominent as any of these businesses. It’s therefore right that it should be scrutinised as it has been.

So, what now? Like I said, Uber should continue. It serves far more than just the rich, the lazy and the drunk. As someone personally who has seen their vision deteriorate significantly since childhood, I rely on it a lot for travel after dark, as will many people. But the service – which often fails to stop in the right place or have drivers who know the difference between north or south – needs to improve.

The company needs to enhance its corporate governance. It needs to act like a grown-up and manage issues with the maturity of any company claiming to have the same valuation. It should be fully transparent with the regulator and establish an independent ethics board with representatives from appropriate groups, including the Metropolitan Police.

We can be more ambitious though. At a time where pollution and congestion levels are growing, critics have rightly questioned how “efficient” it is to have hordes of cars hanging about merely so people can grab a cheap fare somewhere already served by a bus route. Why don’t we therefore use private hire regulation to more aggressively push greener vehicles? Rather than dish out licenses to any old fume spluttering old rust-bucket (not all Ubers are Priuses or E-class Mercs, which are pretty pollutey), there’s nothing to stop us changing the rules to only promote the very greenest vehicles.

The market would adapt to respond to this and such a move could help fuel the investment needed into vehicles and the charging infrastructure currently been debated.

Above all though, what companies can learn here is that taking any position for granted is risky. Investing in corporate governance, in people and in doing the right thing costs more but offers far more insulation when things run off course.

Putting Crossrail 2 on the map

While there are some downsides to living within walking distance of Arsenal, the flipside is being able to walk into work on a nice day in about 20 mins. Avoiding the daily anger of rush hour Tube-ing is well worth putting up with the nightly blue light serenade that comes with living centrally or the terrible, terrible service I currently suffer renting via PG Estates, an estate agency.

Having seen areas like Finsbury Park and Blackhorse Road, both in north east London, emerge in recent years as Angel, Islington did 20 years ago, opens up a world of possibility for Crossrail 2. Regeneration occurred here largely because they are cheaper than plush Highbury and boast super-quick connections via the Victoria Line. Development around the former Arsenal stadium – not without controversy – also helped shovel in a few more pennies.

A recent seminar, hosted by Fieldfisher, a law firm, eloquently set the stage for London’s next great infrastructure project (assuming that the Third Runway will still be in legals in 2030). Even thinking about how to build a £30bn twin-tunnel bored through sticky London clay between Wimbledon and Tottenham Hale makes my brain hurt.

What’s worrying though, is that just as much energy and expense will go into a lot of needless legal and planning faff as the more virtuous task of avoiding the wealth of structures – and other tunnels – massed across the capital’s increasingly congested underbelly.

While respecting the limits placed on her by purdah, Michele Dix, chief executive of Crossrail 2, laid out the enormity of the task at hand. The cost of the scheme is now estimated at £30bn – up 10 percent from when it was originally announced, although the final cost could well be more.

Dissecting London diagonally from northeast to southwest will connect Surrey and Hertfordshire to the capital. But crucially, it will connect affluent areas such as Hertford and Wimbledon with less salubrious new stops such as Lea Valley which has swathes of undeveloped land sitting not 20 minutes outside the capital’s core.

Areas like Lea Valley which sit in the hinterland between the Victoria Line and TfL Line that conects Essex to the City could prove popular with developers as the land is cheap and well connected. A model for this could be Legal & General’s build to rent scheme on Ferry Lane, near Walthamstow down the road, designed by Assael Architecture.

L&G’s Pete Gladwell, presenting, outlined the vastness of the insurer’s appetite for housing. Its foray into residential investment follows Essential Living’s deal with TFL on the redeveloped Archway Tower which is now a RIBA-award winning building – the first purpose built rental block since Dolphine Square. The Tube owner gets a share of the rent as it has retained the headlease to the former brutalist office block.

The rail link would enable 270,000 more people to get into London each day. It would be built by the early 2030s. Ms. Dix promised that, as part of this, Crossrail 2 would also unlock many new areas for development and could pioneer land value capture in order to fund it.

Fairly capturing the masses of profits made around such schemes has been a longstanding challenge. For landowners lucky (or, in some cases, smart) enough to have owner or acquired sites around projects, the boon of infrastructure has been monumental. But the distant unfairness of private speculators gaining solely as a result of public investment pains many citizens. This matters because it contributes to many of the reputational hurdles developers face via the planning system: the prevailing feeling that the public does not benefit from development.

It’s important to address this, not simply for PR value but because without it, new railways won’t get built.

L&G’s Gladwell talked briefly around the potential for patient capital – such as insuers or pension funds – to invest more in infrastructure the way his company is now looking at long-term rented housing. Whether through equity investment or long-term debt finance, unwrapping more of the pension fund pounds currently tied up in stocks or bonds could put it to much better use in Britain. It’s fascinating to try and chart the bredth of L&G’s own activity – which stretches from funding East Anglia trains right through to clean energy.

With Brexit on the horizon, the need for Britain to be more self-sufficient and for its economy to be more balanced is obvious. As I mentioned in this Sky News interview (below) last week, it’s worrying that Crossrail 2 seems to be missing from the Conservative manifesto (where it was present in the previous two). It has to go ahead and while we’re cracking on, we need to ensure that land value capture is done right – and fairly. What that looks like precisely will have to wait until another day.

Shedding Industrial's Old Image

Last week, I helped chair Property Week’s SHEDS conference in Birmingham. Like the reunion of an old rock band, the revitalised event was played out in front of packed audience, helped by the new lease of life given to industrial property largely by e-commerce and the ‘Amazonisation ‘of retail and logistics.

Significant attention was poured around last mile logistics with a fair dollop of debate on the potential for mixing in more residential – something I’m personally rather anxious about. One thing everyone agreed on was the need for greater understanding of the contribution made by this sector and with government’s industrial strategy consultation doing the rounds, there’s a real opportunity to help inform policy.

Following the major 95-page report authored by Blackstock Consulting entitled, How Soon Is Now: The Disruption and Evolution of Logistics and Industrial Property, produced on behalf of Addleshaw Godard, we’ve set out a number of recommendations we believe can help the sector.

1. Government must recognise the importance of logistics and industrial property to the country’s economy

The industrial and logistics sector is a vital source of employment outside London and the south east, particularly in the Midlands and North, and in coastal areas that have been largely forgotten at the expense of our cities. It makes sense to prioritise support for industry.

2. Councils should be made to designate land for industrial use

In local planning housing policy often trumps employment policy but this is not necessarily always the best priority. Housing and planning minister Sajid Javid should encourage local authorities to prioritise properly thought-through employment policies. We should also consider what different types of industrial sites are now needed. If consumers want products within 24 hours, then infrastructure, real estate and transport will have to support this.

3. Government should work in conjunction with the private sector to bring forward more public land for designated uses

The growing demand for industrial space along with the dwindling supply on offer has seen rents rise, putting pressure on business costs. The Government needs to encourage local authorities to identify more land for industrial development, and in suitable locations near to transport networks and junctions.

4. Government should look to directly support development by SMEs

The Homes and Communities Agency has £4.7bn of grant funding available for affordable housing. A similar budget to kick-start industrial development for land assembly, remediation (cleaning up sites) and infrastructure would offer broader benefits to both employment and housing delivery.

5. Invest in and empower local planners

Developers and ministers routinely criticise local planning for being slow. But a complex planning process is not helped by contradictions between national policy and local concerns and a dire shortage of planning officials and investment in the profession. Delegating greater powers to planning officers could expedite the approval of non-contentious applications without unnecessary delay.

6. Properly coordinate transport infrastructure

Major projects must contribute to the logistics network effectively and support growing needs. We should clearly set out the routes of major projects at an early stage, which will avoid costly planning delays and allow investment to be deployed early.

7. Better road transport

The Government has already invested significantly in road improvements over the past seven years but the pace of investment must be maintained. The number of road users is continuing to rise, mitigating the improvements that have been delivered. Highways England should work more closely with Network Rail to further integrate road and rail capacity during off-peak periods at night.

8. Using finance and technology to drive increased rail freight capacity

Rail transport is not a viable logistics option for many UK firms, due to the relatively short distances covered and the high cost of access. There are a number of ways to address this; first, access contract lengths should be offered in line with real estate lease lengths. Second, there needs to be better use of technology to manage the network and incentives to create new, less damaging rolling stock. Finally, if the Government wants to move more freight off the roads and on to rail, it will need to ensure that the charges paid for accessing the rail network are fair.

9. Focus on skills

One of the biggest risks to many of Britain’s business sectors is our future pipeline of skills. This is in evidence both in the road haulage sector, which currently has an employment shortfall of 60,000 hauliers, and similarly in construction, which faces an estimated shortfall of 700,000 workers over the next five years.

10. Making business rates transparent and fair for all ratepayers

The charging of business rates on empty properties disincentives the speculative development of industrial and logistics property. Rates shouldn’t be levied on speculative schemes until they have tenants. Some individual councils already do this, but the Government should take the lead and make it national policy.

11. Continuing EU funding after Brexit

Currently, the EU provides various grants and funding for major infrastructure projects that support industrial development. The Government must commit to matching this funding after Brexit.

12. Create an industrial forum to identify sites and overcome barriers

And finally, a national forum identifying sites suitable for logistics use or infrastructure to assist logistics transport will drive development of the 18 million sq ft of logistics space the UK needs each year.

Heathrow: time to shut up and build the runway

Major changes have been made to the planning system by successive governments. Yet whether we’re discussing nuclear energy, fracking, airports or indeed, housing, planning reforms dominate the political debate. All too often however, democratic decisions taken nationally are overturned due to other interests.

Democracy should be about balancing those interests – not pandering to whoever can shout loudest.

The fundamentals of the planning system have remained the same since the first Town and Country Planning Act in 1947. This is not something to be ashamed of: it is a system that, perhaps uniquely, places democracy and consent at the heart of the system.

Planning remains a consensus that the system must balance the interests of developers and communities. It engages the electorate and gives them a major say over what gets built and where.

Yet all around us, projects of national significance are stalled amid debate, political wranglings and legal tussles as vested interests are fought over and key decisions delayed. Heathrow is the best example.

While the 2012 Olympics was delivered efficiently and on budget, it remains the exception, rather than the rule. Key decisions about airport expansion – agreed over a decade ago – have been continuously delayed to avoid political fallout, HS2 was bogged down in litigation before the bill’s second reading had even occurred and housebuilders remain frustrated by the delays in receiving consent for homes that politicians blame them for not delivering. This has to end somewhere.

In a democracy, it is right that big decisions like Heathrow are scrutinised. But the public should not be misled into thinking that planning decisions represent a referendum – they don’t. We have an elected government that has taken a decision. What we should be doing is ensuring they keep their promises around the environment rather than finding more ways to tangle it up in knots. And while many would love the sight of Boris being chained to the runway, this would only heap further embarrassment on Britain’s current international standing.

Take vested interests out of infrastructure debate

In one of the first broadcast hits I did during my time at BAA on the ever-popular passenger travel data, I pressed the apparently dull subject of Heathrow’s increasing cargo volume. As was sadly ever the case, this perplexed some colleagues to whom I explained we needed to begin (not so subtly) making the economic case for a hub airport. So began the genesis of a long campaign.

What irked me when listening to BBC Radio 4’s Today Programme this morning wasn’t solely the fact that neither of its two economist guests supported long-term infrastructure investment. It was also the fact that Jonathan Portes, introduced as a research fellow at NIESR, wasn’t noted for his very public role as a supporter of the Stop H2 campaign.

The other guest, former Bank of England monetary policy committee man Andrew Sentance, a man known for generally taking the opposing view to whatever the party line is. He generally makes good radio but like Portes, some of what he said was perplexing. Portes insisted that “borrowing and spending on public investment when rates are low… is broadly common sense” but went on to slam HS2 as making no sense. Surprise, surprise.

Sentance said that the government “needs flexibility in fiscal policy” and that “reducing the burden of business” and “giving the go-ahead for airport expansion” were key. So far so good, but then he insisted that moving the emphasis away from longer-term projects to shorter-term schemes was preferable.

The lazy fall back both made was on “relaxing planning rules” – that catch all solution for doing everything. “You could allow councils and housing associations to build houses really quickly if you relax planning rules,” Portes said. He’d obviously forgotten about the slight economic blip housing associations encountered when George Osborne kicked away their knees by cutting social rents by 1 percent a year.

Planning is the least of housing associations’ worries, by some margin. The point around councils borrowing is also much discussed. Yet, given the routine failings of many councils on everything from parking policy to the care of older people, I’d question whether these people should be trusted to hold the purse strings of such investment. For example, my local council in Haringey was called out for its shameful negligence in funding care for a neighbour of mine. It’s not the kind of story I enjoy placing with the press. Notably, as an aside, even after the BBC turned up with cameras, the council leader failed to act.

I stress this point because these are the same people who would be charged with borrowing cash to build homes on what would essentially be a taxpayer supported balance sheet. It is true, however, that a greater focus on small infrastructure projects – whether “hard” or “soft” (roads or schools) – is needed but not at the expense of long term investment. You could well argue that HS2 is in the wrong place: more could have potentially been achieved by going up Britain’s east coast, regenerating nowhere towns, like Stevenage, but anyone using trains knows that more capacity – irrespective of any speed increase – is essential.