02 November, 2011
The Government’s attempts to tackle the national housing shortfall are doomed to failure if it does not unlock a new source of long-term funding to build homes, according to a new report from DTZ published today.
In 'Pulling Up The Ladder 2', real estate services firm DTZ claims the Government’s plans to reform the planning system and accelerate the release of public land do not address the fundamental issue constraining growth in housing supply. In the continued absence of long-term finance for new homes, completions will inevitably fall a long way short of demand – even if the supply of land is greatly increased.
The DTZ report argues the Government needs to act as “market maker” behind a new housing development model in which major financial institutions make up the funding shortfall via long-term investment in new build homes for rent. As significant holders of commercial property assets, major institutions are the logical source of funding for residential developments.
Over the last two years, only 130,000 new homes a year have been built in England – a shortfall in supply relative to the annual growth in household numbers of 100,000 homes. Planned reforms, alongside an improving mortgage market, will increase supply by an additional 30,000 new homes a year. But this still leaves the nation 70,000 new homes a year short of the anticipated 230,000 per annum requirement.
Chris Cobbold, head of DTZ’s residential practice group, said: “At present the Government’s strategy is like a two legged stool: relying on the traditional house building model and the new model of affordable housing delivery. This will not deliver the number of new homes the nation needs. A third leg, long term institutional investment in the residential sector, is essential.
“There has been a lot of talk about attracting institutional investment, but outside the student residential sector it hasn’t happened. The Government needs to take this by the scruff of the neck and establish half a dozen pilot schemes to demonstrate to investors that they can make the consistent, predictable returns they are seeking.”
Pilot schemes, built in partnership with selected institutions, would act as “showcase developments” for the new funding model. By demonstrating the validity of the model, perceived risks will fall and finance will become more readily available, allowing new homes to be developed for market rent on a large scale.
The new development model needs to balance the interests of five different parties – landowner, planning authority, investing institution, construction company, and asset manager – to deliver the necessary returns. To get the model up and running, the Government would need to provide the initial impetus by making public sector land available at no upfront cost, while the planning authority has to provide total flexibility on affordable housing requirements. In exchange the projects would grow expertise, help drive down management costs and improve investment returns to the point where government assistance is no longer needed.
Cobbold said: “Reform of the planning system and actually having the finance to increase housing supply are two separate things. The bigger issue is finance, without which we are not going to get anywhere close to the 230,000 new homes a year we need. Failure to address this central point will result in increasing numbers of adult children living at home into their 30s, increased overcrowding and dependence on shared accommodation, and growing poverty as housing costs absorb a higher proportion of incomes.”
Cobbold fears that the Government’s new Housing Strategy will fall short of what is needed, adding: “We’re not expecting to see a lot that’s new - a more coherent framework perhaps, but nothing really substantive about mortgage finance or willingness to take the lead in demonstrating how new build market homes rent homes can be delivered with institutional funding. The Government needs to knock heads together and take the lead in attracting institutional investment now, because the sad reality is the finance won’t materialise on its own.”