No one can doubt that the UK property sector is in crisis. For all the talk of the problems in the manufacturing and retail sectors, their discomfort is mild compared to that felt by property developers. Some retailers are suffering a 7% fall in turnover and car sales are down 11% – but housing transactions have plummeted by 60%.
With nearly 2 million people working in the construction industry and the Government’s house building target of 2 million new homes by 2016 now seeming impossible to achieve, the collapse of the residential and commercial property markets are having a profound impact.
For local authorities, there have been further related problems – income from planning applications and capital receipts from the sale of land have vanished. This has caused a crisis for their revenue spending plans and capital programmes.
But some councils are determined to stick to ambitious capital programmes, despite the inability of local developers to pay even current market values for land purchases from councils. One of the most ambitious schemes has been put in place by Kent County Council, which is putting its vacant unsold property assets into the Kent Property Enterprise Fund 2.
A private sector developer will be chosen to enter into a joint venture with the council, who together will work up schemes for using the land, applying for planning permission and getting ready to move quickly ahead with construction projects as soon as the economy improves. The fund will hold property that, before the slump, was valued at £160m, but which is now assessed by the council as worth £85m to £90m.
Paul Carter is leader of Kent County Council – and himself a property developer in London. He told Accounting & Business about the new fund. “This is a very innovative solution to a difficult problem we are faced with as a result of the significant impact of the recession on residential and commercial development,” he says. “We have always had a very ambitious capital programme.”
That capital programme – for the construction of schools, other public buildings and for regeneration schemes – normally runs at £600m to £700m a year, part-financed from the council’s capital receipts. But in the new financial year there will be little opportunity to generate the usual level of receipts from land sales. Instead, the land that had been allocated for sale is being placed into the fund, giving the council the confidence to believe that it could soon again begin to generate capital receipts. In the mean time, the council is using prudential borrowing powers to obtain the funds that allow it to continue its capital programme as previously intended. This, in turn, will help to maintain local commercial activity and maintain jobs.
“What we have done is to identify those sites that add up to £160m of capital receipts and transferred those into the Property Enterprise Fund and reduced the value of those sites by 30 or 40%,” says Councillor Carter. Consequently, these are now shown as being worth only about £85m to £90m. Under the terms of the joint venture, the selected developer will be allowed to defer any financial contributions towards the cost of the site, either until the sites are sold, or the market recovers.
Similar initiatives are being worked-up by other local authorities. Bolton City Council is seeking approval from the Government to set-up a Special Purpose Vehicle to create new affordable homes, operating in partnership with Bolton at Home (its arms-length housing management organisation, or ALMO) and local housing associations. The aim is to continue building social housing and private sector new homes, despite the national slump in house building. Under the terms of the SPV, the council would make land available immediately, but defer the capital receipts until the private housing was sold. The council would obtain a guarantee of payment from future housing sales.
This model was developed in partnership with PricewaterhouseCoopers, which is promoting similar schemes with several other local authorities. PwC stresses that there is an impending crisis with the supply of affordable housing, as half the affordable housing built in the last two years was provided under Section 106 agreements – supplied as part of the planning consent for new private development schemes. With the collapse in the construction of private sector schemes, the supply of affordable housing will be severely cut back.
To make matters worse, several housing associations are themselves in crisis. Much of housing associations’ own building schemes in recent years have involved joint ventures with private sector developers, constructing estates with a mix of private and social housing. But some of those developers are in severe financial difficulties, new homes are not selling and many schemes face delays in completion. As a result, several housing associations are in crisis.
Now some of the more wealthy housing associations are being asked by the sector regulator, the Tenant Services Authority, to lend money to smaller associations in trouble. There remains, despite this, the possibility of widespread failures of housing associations in the current economic climate.
“Relations between housing associations and their funders have been strained in recent months, with banks often finding it necessary to protect their own vulnerable positions by re-pricing existing housing association debt which was borrowed in better times and at very low rates,” says Mitch Brown, a real estate partner at law firm Eversheds. “Housing associations are taking the view that some of these demands have not been justified and have threatened their ability to deliver efficiencies and to address the current housing crisis.
“Accordingly, there was clear potential for delays to negotiations between associations and their lenders, thereby threatening the social landlords’ short term viability.” As a result, suggests Brown, the rescue model may need to be adopted more widely, supporting other housing associations in crisis.
Meanwhile, the Government is itself stepping-in with iniatiatives to provide some life to the affordable housing sector. Housing minister Margaret Beckett has made £200m available for social landlords to purchase unsold new homes for use as affordable housing, either for rent or through low cost home ownership schemes. About 5,000 homes have been purchased in this way, through a National Clearing House. In the largest of the deals, Bovis Homes sold 379 family homes to seven housing associations.
It would be misleading to suggest that the action by national and local government, or the self-help by housing associations, is steering the property sector away from crisis. But it is at least clear that effective and fast action can mitigate that continuing housing crisis.