UK development overview Q3 2020

We saw last quarter that residential development activity quickly recovered to pre-pandemic levels once sites were able to open up again. The updated weekly EPC data shown in Figure 1 suggests that output in Q3 has continued on a similar pace to 2018/19, with only a small catch-up of the 25,000-plus ‘lost’ new homes from April and May.

Comparing the two trajectories shows 26,400 fewer new build EPCs in 2020 so far, a 14% fall versus the 2018-19 average. If the rest of the year continued in-line with that average, the total number of new build EPCs in 2020 would be approximately 212,000 – 11% lower.

Affordable housing

Help to Buy (HTB) is a significant component of the new build market, accounting for around a third of sales. It is particularly important in enabling deposit-constrained first-time buyers to access the market. The availability of high-LTV mortgages has substantially declined this year as lenders adjust their risk appetite, so we would expect HTB to play a big role if the development sector needs boosting post-pandemic. But changes to the scheme next year could see this role limited, particularly the regional price caps which will force a shift in activity towards lower-value markets in each region.

The government announced the details of the 2021-26 Affordable Homes Programme (AHP), worth up to £11.5bn and aiming to deliver 180,000 homes. Half of the homes will be discounted homeownership products, the majority of which will be shared ownership. But new shared ownership homes will have some significant strings attached for the developers, with the aim of making the product more affordable and more attractive for residents.

First, the minimum initial share will be reduced from 25% to 10%, reducing the upfront income a provider receives on selling the first tranche. The minimum staircasing increment will fall from 10% to 1%, potentially adding to the administration burden (in the form of more frequent valuations and legal costs). Finally, the provider of the homes will be liable for the first ten years of repairs and maintenance – currently this burden falls completely on the occupier.

Figure 2 shows the local variation in shared ownership delivery as a proportion of all new homes in the year to March 2019. There is no clear geographic pattern, but it will be interesting to see if the changes to the tenure lead to a different profile of delivery in future, as well as achieving the overall levels targeted.

Figure 2 – Shared ownership supply by local authority, 2018/19

Source: MHCLG

The funding for homeownership products also covers a pilot of 1,500 ‘First Homes’, new homes for local first-time buyers and key workers with a 30% discount. In general, the premise is that the First Homes would be funded through s106 obligations (or whatever replaces it – see next section). Some commentators have expressed concern that these homes could squeeze out other affordable homes that more obviously meet housing need. The previous attempt at something similar, ‘Starter Homes’, was a resounding failure. Zero of the 200,000 starter homes promised back in 2015 were ever delivered after issues with the nature of the discounts and how to value the homes.

Even the new rented homes delivered through this AHP will in general be subject to the ‘Right to Shared Ownership’, where tenants would be able to buy a portion of the equity in their home, and then increase it in future.

Planning policy changes

Another quarter, another planning policy update. Unlike the technical changes covered last quarter, the latest move is a major change to the whole system. The White Paper proposals currently being consulted on (official summary here) include all land being designated into one of three ‘zones’ – growth, renewal or protected – which will determine in general how much development will be permitted.

Clearly the devil will be in the detail but the aims to streamline the production of Local Plans, increase community involvement, and simplify developer contributions (replacing s106 and CIL) all seem positive.