The challenge of viability and volume

For developers and housebuilders looking to bring forward sites either from their current land banks or through acquisition, viability more than ever will be at the top of their agenda. With erosion of new-build premiums and price falls since the peak of the market, many areas will still prove challenging in terms of scheme viability (See Graph 1).

When taking into account build cost, infrastructure, S.106 agreements and affordable housing, we expect areas where values are currently below £150 per sq ft to be unattractive to all but the most bullish developer.

The areas sub-£150 per sq ft (many of which are located in the Midlands and North of England) are also, on the whole, located in areas within which we expect price growth to be lower during the recovery. This could therefore mean many schemes are challenged in terms of viability for some time yet.  

New-build scarcity?

The availability of built or nearing practical completion stock will, we believe, become an issue as the market recovers.

The combination of access to funds, mothballing and viability challenges mean we expect both starts and completions in 2010 across the UK to be just 50% of their 2006 peak. Recent surveys by the House Builders Federation suggest that since mid-2009 levels of both completed stock and work in progress have been insufficient to meet demand.

This supply-demand gap will, of course, be location specific, with the highest levels of demand and relative lack of supply being in areas of London and the South East.

Impact on Government targets

The reduction in levels of new-build activity, coupled with our forecast for lower levels of new-build completions as the market recovers, have major implications for Government housing targets.

Housing completions, which historically have not equalled the growth in the number of new households (on which targets are based) are expected to remain lower than new household formation. This creates significant housing scarcity over time, with the prospect of a shortfall of a million homes by 2016.

New approaches to enable the delivery of the volumes of stock will be required to meet these targets. Alongside the Government’s pledge for greater localism towards development and planning, new approaches will be required for large schemes.

This is likely to mean a movement away from short term profit to longer term funding and scheme stewardship to ensure new developments remain successful, and indeed profitable over the whole build-out period, which in some cases could be decades rather than years. To maintain rates of sale, developers will need to appeal to the widest possible range of occupiers by offering a much more diverse portfolio of housing types at different pricing points.