Why Grosvenor doesn’t build homes

COMMENT Grosvenor is an organisation with nearly 350 years of experience in UK real estate. In that time, we have developed some of the country’s leading neighbourhoods, from Mayfair and Belgravia to Liverpool One. Yet despite the evident chronic shortage of housing we face, and the inexorable rise of house prices, just like many other property companies, we don’t build homes at scale. In boardrooms across the country, property companies have looked at housebuilding and decided that unless you can realise the economies of scale only possible when buying tens of thousands of door handles every year and Dulux Almond White by the lorry load, it’s just not very attractive. Considering the current real estate environment, where offices and retail are out of favour, residential should be attractive. Yet beyond an increase in investment in build-to-rent and PBSA, companies are not moving into direct delivery in a meaningful way. With the election creeping closer and battle lines drawn on housing numbers, the question many should be asking is: who is going to build the homes politicians are promising? Precarious positions As everyone will be aware, housing associations are contending with a raft of issues that require their focus to be on existing homes, with research indicating that investment on new delivery in 2024 will be 9% lower than the previous year, as capital is redirected towards decarbonisation and building safety. That’s £1.5bn not going into new homes. Some councils are tentatively increasing supply, but the recent news from Croydon and Birmingham shows how precarious their funding position is. There are well-known reasons for the current composition of the UK housebuilding sector. The planning system and decades of under-investment in infrastructure and affordable housing are prominent issues, but just as significant is the exodus of the banks from the lending market since the GFC. Banks, the traditional source of finance for housebuilders, have gone from providing close to 100% of institutional real estate loans between 2004 and 2007 to around 60% of loans today, as regulation has made it increasingly harder for them to operate in this market. This retrenchment means there are relatively few lenders active in the residential development lending market. This issue is understood within government, with Homes England providing funding for new entrants and forming a number of lending alliances with institutions. But despite this, there are presently fewer than 25 lenders tracked by the main industry source operating in the residential market, which is similar to the active lenders in the office and industrial development market, even though the residential sector is larger than both sectors combined. This paucity of lenders is partly what led to us launching our residential development debt strategy. Through our funding to date, we are contributing to the construction of 1,800 homes – a far higher number than if we had entered the sector as a developer in our own right. Key questions The strong demand for our funding has encouraged us to expand our activity and we now expect to invest just over £900m over the next 10 years to support new homes of all types and tenures. The benefit isn’t just new homes. As we build our capabilities and scale, we’re increasingly able to innovate and consider how we drive wider positive outcomes from our funding, such as incorporating environmental incentives into our lending facilities, something we have done in a few of our recent agreements. Alongside the commercial rationale for our activity, we see increasing our support for the housing delivery as a way of delivering social value, by addressing one of the primary barriers to building the homes the country needs. With policymakers increasingly acknowledging that the planning system and the housing crisis act as anchors for the country’s long-term economic growth and outline solutions, I would suggest that as well as asking who’s going to build them, they should also be asking who’s going to fund them. Rachel Dickie is executive director of investment at Grosvenor Image © Thomas Graham