Coronavirus by numbers: responding to financial stress in resi development

COMMENT We have all seen the numbers reported in the past few weeks that demonstrate the economic impact of the coronavirus pandemic. The economy shrunk by more than 20% in April, the number of people claiming work-related benefits increased by 126% between March and May and some economists think unemployment could hit 10%, particularly when the furlough scheme ends in October. Having begun my career in 2008 with the plight of Northern Rock ringing in my ears, these numbers do not make for comfortable reading. It will surprise no one that the pandemic has hit the housing market hard. The Bank of England announced that mortgage approvals fell by 80% between February and April. In terms of loan-to-value ratios, Knight Frank has reported that, while 90% mortgages accounted for 6.6% of mortgage activity pre-pandemic, this fell to 1.4% in the first week of June. Reduced mortgage availability and lower consumer confidence are likely to be continuing themes for 2020. New-build housing is only one part of the housing market, but it is an essential one. We have a need for more affordable housing in the sale and rental markets, and more housing generally to support economic growth. How can developers react to the changing economic environment? Right product, right price Affordability within the housing market is not a new issue. According to the Office for National Statistics dataset issued in March 2020, across England and Wales the ratio of median house price to median gross earnings in 2019 ranged from 28 in Kensington and Chelsea to 3.29 in Burnley. Bearing in mind that 22 of the top 30 are London authority areas, my hometown of Cambridge falls at number 31 with 12.66. This might seem paltry when compared with parts of London, but take into account the fact that lenders do not generally offer mortgages above five times salary and (ignoring, for the sake of argument, any deposit put down) it seems that in only around 20 out of 339 authorities in England and Wales can someone earning the median salary afford the median-priced house. These numbers obviously miss out a lot of detail but it is indicative of the problem, which leads people to live further away from their place of work, or to pay a significant proportion of their wages in housing costs. However, there are themes developing which may change the look and feel of future housing. Modular construction is certainly one to watch, as more manufacturers step into the sector and mainstream funders and developers such as L&G, Urban Splash and Berkeley gear up production. Modular can bring savings to development costs, particularly with avoiding on-site delays, and, combined with faster overall construction, this might result in a more affordable price. However, off-site construction and transportation costs affect modular more than traditional construction and, depending on the lifespan of the modular housing, mortgages might be more difficult to obtain. In the past couple of years there has been an increase in the development of co-living schemes and “micro-apartments”. Post-pandemic, will there be the same demand for this type of accommodation? A planned office-to-resi conversion in Cambridge has recently been the subject of a petition on the basis of the small size of the units, with the city council promising to review permitted development rights as a result. This is a reflection of how the pandemic might change attitudes on the type of housing we want to see, but means that developers focusing on the first-time or young professional buyer markets may need to consider an alternative offering to continue to appeal to their audience. PDRs are already excluded from a number of local authorities across the country. Might we see a change in attitudes towards PDRs or minimum space requirements being applied for residential conversions? Government-led progress? With public funds being diverted to support the economy during the pandemic, it remains to be seen whether the government is able to provide any incentives, such as a stamp duty land tax reduction, or an extension to Help to Buy to act as a stimulus to the market. The government already lends its support to community-led development, particularly through the planning process. This can help provide housing for those living and working locally while encouraging community engagement. It can also unlock land which otherwise might not be made available by landowners or which would be constrained by planning rules. We are seeing increasing opportunities for community-led development to lead the way on locally affordable housing, often incorporating off-site or modular construction as a means of controlling costs and mitigating the impact on the local community. Not only can this type of housing help those struggling to afford to buy in their area, it can assist the rest of the market (whether for those looking to downsize from large family homes, or enabling people to buy outright who would otherwise stay in rented or shared ownership, thus making those tenures available for others). A brave new world So where does that leave us? The pandemic has shone the spotlight on the impact which consumer confidence has on markets such as the property sector. We may see a change in behaviours from end users demanding more space at a lower price as a result of lockdown. Could community-led housing, combined with modular housing or other modern methods of construction, enable developers to build affordable housing, not as a cross-subsidised poor relation of private housing, but as housing which turns a profit in its own right? Katy Klingopulos is a senior associate in the commercial real estate and real estate development teams at BDB Pitmans