The day after the Spending Review, a gloomy looking residential development industry gathered at London's Dorchester Hotel for the Movers & Shakers breakfast, with Berkeley Group chairman Tony Pidgley as the star turn, alongside legendary property developer Gerald Ronson and Homes and Communities Agency chief executive Sir Bob Kerslake. It figures that if anyone can pep up the housebuilding industry, Mr Pidgley can. Renowned for calling the housing market correctly on several occasions, his London-centric business has survived the downturn, is cash-rich, and is pursuing many new development projects. But his message was not one of good cheer.
"The industry is in for a difficult three years," he said. "After an announcement like yesterday's, why would you go and buy a house? You're going to sit on your hands and wait. Lenders want 30 per cent deposits, and there's no sign of the mortgage market coming back. The government doesn't appear to have any sympathy for housebuilders. If I can cut through the bureaucracy [of Localism] I will welcome what they are doing. But the good news is, in the medium to long term, there's going to be a housing shortage. If you want to buy a house, my advice is do it in the next three to six months. This is the low point."
Time to rent?
In the meantime, entering the rental market is an attractive option for housebuilders - and a path endorsed by government. Sir Bob Kerslake is of the view that the housebuilding industry is entering a "new reality" with a period of very low activity levels going forwards."The extent to which people succeed and prosper relies on recognising how much the housing market has changed, and adapting the way they do business," he says. "HomeBuy Direct had a dramatic impact, but those schemes will not continue going forwards."
To his mind, this new model would include "build for rent as well as build for sale", and "a new and radical overhaul of the social housing model where local authorities will share risks, and put in land on a joint venture basis."
Last month, Berkeley became the first housebuilder to join the HCA's Private Rented Sector Initiative and will receive nearly £46m of funding to build 1,778 homes for rent. Berkeley intends to launch a private rental fund which will own 555 of the homes, which will be rented on the open market.
Mr Pidgley also revealed a second fund, targeting the "intermediate rental market" (above social rents, but slightly below full market rents) was being worked up. The plan is to build 380 units for rent, and funding support is in place. "This is a model you will see more and more," he says.
"You've got to learn to hold product, manage it and keep it. It's a learning curve, but we're having a much easier time of renting than we thought. It's a professional, middle class market. Properties don't get damaged, the maintenance isn't there, the only problem is renter default. Then it takes five months through the courts to get them out."
Sir Bob points out that nationally, statsitics are showing a reversal of numbers in home ownership, and a rise in renting. "People can't buy so they're renting, and London rents are rising significantly," he notes. "Other people will follow Tony's example, and [the HCA] is working with a number of funds at the moment. In London and other major cities, it's the logical direction to go in."
Heron swoops in
Mr Ronson, whose private firm Heron International has recently re-entered the housebuilding arena, was less enthusiastic about build for rent. "If it's viable, you've got to be able to get long-term money from banks," he says. "Will I build homes for rent? Yes, if I've got a margin. A lot depends on where it is, and there's also the question of inflation. Will annual indexation be built into rents, and will we see three year or five year rental agreements?"
As the planning system moves to an incentive-driven model (the New Homes Bonus means councils receive the equivalent in council tax take for every new home they approve for six years) local authorities are imbued with even greater powers. Developers fear that this comes at a time when there is less public money for housing. So are local councils up to the job?
"Some of them are, and some of them have a way to go," admits Sir Bob, noting that the areas of highest demand will be the high-value markets of London and the South East. Outside of these prime markets, the outlook for new development is so dire that Mr Pidgley reveals: "For the first time in my life, I've had people me offer to give me land for nothing." Adding that half of Berkeley's sales currently come from overseas, the problems of a London-centric business are peanuts compared to those in the Midlands and the North.
However, there are areas of London that Berkeley is avoiding. "We won't touch East London because it's a building site," he proffers. "Supply is enormous." And he cannot resist having a pop at local authority red tape before he leaves the stage. "I know more about bats than the local bat officer in most councils," he claims. "You name it, they've got an officer for it... it's bureaucracy gone mad. But we can't start development without a bat licence. This goes to show, if the industry doesn't respond to localism, it's going to die."
