How to respond to the UK housing crisis

The UK needs to build 240,000 houses each year over the next ten years to keep up with housing demand. Large volume builders are currently building 125,000 houses per year. The deficit cannot be made up by small developments alone. In this article, written in 2015, we discuss the UK housing crisis, and present a case for how retail-led developers and landlords can respond positively and profitably to this opportunity.

The UK housing crisis is less about financial supply and government initiatives such as ‘Help to Buy’ and ‘Right to Buy’ than about housing supply. We need to start building houses, and build on a major scale. Given the current planning restrictions, how can retail-led developers and landlords respond positively and profitably to this opportunity?

The UK housing crisis

At the 2014 UK Chartered Institute of Housing (CIH) annual conference, speaker after speaker confirmed the widely held view that demand for housing has long since outstripped supply, and the situation is growing worse by the month. The CEO of CIH, Grainia Long, told over 1,000 attending delegates that she is looking forward to the day when the word ‘UK housing’ is not automatically followed by the word ‘crisis’. There was much discussion as to what action government should take, and to how the UK construction industry should react.

The need for a political solution

The general consensus amongst housing experts is that we need to build 240,000 houses each year over the next ten years in order to address the current UK housing shortage. Clearly, this cannot be solved by building one or two garden cities at 30,000 units each. The problem needs to be at the top of the political agenda. A current change in planning regulations to simplify the ‘change of use’ process is a good start. The UK government, in their policy document ‘Making the planning system work more efficiently and effectively’ (updated November 2012), highlighted the problem of planning decisions sometimes taking too long. This can slow down or prevent people building new homes, creating new places and bringing disused or neglected land and buildings back into productive use. Their focus is on ensuring that the planning rules, or poorly managed planning processes, do not unnecessarily prevent or delay development. But, to be really effective, there is a need by government to look at the wider context of urban regeneration and the decline of town centres.

Despite government initiatives such as the creation of Housing Zones, and the £600m Stimulus fund to build on brownfield sites, there is, as yet, no clear national policy on urban regeneration. Yet this is one area which has the potential to unlock suitable land to meet current housing needs. Creating a financial incentive to stimulate mixed-use development, with the residential component being a key focus, relies on central and local government action. What is widely recognised in the construction industry is the need for a comprehensive government-led strategy which gets to one of the main roots of the problem - the availability of suitable development land. Left to its own devices, the market cannot significantly increase supply. Therefore, governmental action is urgently required. More land must be released by central government and local authorities. One proposal is that development land which benefits from planning consent should be liable for council tax as if the development had already been completed. Clearly, to make this fair, there would have to be built-in safeguards and exceptions. The green belt area, where the land is not actually green, should also be reassessed, and opportunities brought forward within a more relaxed planning framework.

We also need to build more so-called ‘garden cities’ as well - as already outlined by the government. At Chapman Taylor, we believe that, instead of creating new towns in the form of garden cities, with all of the political and environmental upheaval which these entail, we should focus on extensions to existing towns and cities, where the infrastructure and transport connections are already well-developed. This approach has been most successful elsewhere in Europe, most notably in the development of Hammarby as an extension to the city of Stockholm, Sweden, and in the newly-built neighbourhoods of Vauban and Rieselfeld as extensions to the town of Freiburg in Germany. Last, but not least, we need to see local authorities, supported by government funding, taking forward major town centre mixed-use regeneration and densification projects. That means getting people back into the town centres while preserving and enhancing our built heritage.

While the issue of Government inertia remains to be solved, there are still opportunities for developers to grow their business

On-site construction issues including quality control, contract programming and unreliable weather conditions, along with the decline in skilled building workers, means that construction output of the large volume builders will likely remain stable at approximately 125,000 units per year for the foreseeable future in the UK - far short of the 240,000 houses needed. There are, however, ways that developers can unlock more growth within the residential sector:

1. Construction innovation: In many ways, innovation by the construction industry in the residential sector has stagnated. We know that the standardisation and offsite factory manufacture of components gives greater efficiencies and quality control, yet the construction industry has been slow to accept these new methods of manufacture and construction. To have any chance of meeting the growing demand, we will need to look again at how we procure and build our housing.

2. Target high potential markets with optimal space requirements: Developers and contractors need to be more proactive in identifying suitable sites for one- and two-bedroom flat developments in order to maximise their growth. These could be in a mixed-use context, but should be centrally located with good access to local amenities.

At Chapman Taylor, we are currently focusing our research on two residential growth sectors for our clients. The first of these is that of ‘first time buyers’, who tend to have minimal space requirements and who are actively looking at affordable centrally-located accommodation.

The second is similar in terms of space requirements, but this group are the ‘last time buyers’, or the over 65’s, who mostly own their own (current) homes mortgage-free. Having raised their families on the edges of, or outside, the city, they now want to move to live close to the ‘three F’s’: family, friends and facilities, and often do not want the responsibility of maintaining a garden. This group have huge financial reserves locked up in the equity in their existing properties, and the release of this equity through downsizing allows their children to become buyers as well. As long as there is a lack of suitable town centre housing for them to move into, these financial reserves will remain untapped. Both of these target groups present a massive opportunity for developers, even within the current planning restrictions.

3. Take a leap into the Private Rental Sector (PRS) – the fastest growing housing niche in the market. The sector now accounts for approximately 16.5% of all UK households, or nearly 3.8 million homes in England alone. Growth over the next few years is expected to be rapid, creating a plethora of opportunities for developers who are happy to retain ownership and provide facilities management. The provision of around 150 apartments with communal facilities, retail and office accommodation at ground floor level and attractively landscaped roof gardens seems to hit the sweet spot with middle income younger people aged of 25 -35 who cannot raise the necessary funds for a deposit. Government incentives and legislation are making this type of accommodation more attractive to tenants and landlord alike.

How retail-orientated developers can respond positively to the housing shortage

Retail developers can help unlock town centre locations within their retail-led projects by putting a bigger emphasis on the provision of housing at the upper levels over retail schemes. Historically, developers have been reluctant to do this, as it was felt it restricts future flexibility. The challenges of gaining planning permission, phasing, ownership and complexities in construction of mixed use developments, however, can be offset by spreading the financial investment between retail and residential, and the increased yield of the higher density of the development. With PRS housing above retail schemes, developer ownership of the residential properties is retained, which makes this proposition much more viable.

How landlords can respond positively to the housing shortage

Landlords looking to maximise the return on their housing investments should look to procure well-designed and energy-efficient houses. Housing, where the annual running costs are kept to a minimum, are very attractive to tenants, and encourage longer rental periods as people want to live in energy-efficient, low-utility cost, housing. Landlords can charge a premium for such properties.

How we at Chapman Taylor are addressing UK housing issues

Umbrellahaus® is a sustainable, affordable offsite housing model that can be constructed at scale and speed to provide much needed housing for communities within our towns and cities.