Right, settle down. The political shenanigans are over. Rishi is in charge. Michael Gove is back as Housing Secretary; a man not loved by big housebuilders being dunned to pay for Grenfell repairs. But a hard-worker rewarded with a return ticket for his sheer effectiveness in the job. Before examining what Gove could do to lessen the after-shocks for developers, let us dwell on the nerve damage the jolt to the economy delivered by exChancellor Kwasi Kwarteng on September 23rd in league with departed Prime Minister Liz Truss.
Those fortunate enough not to have acted on a pre-Kwasi development appraisal to buy land can reappraise their options. Those unfortunate enough to have bought land are less fortunate. Those committed to construction are the least fortunate. What all three have in common is the financial equivalent of being jabbed with an electric cattle prod.
By way of example:
• Pre-Kwasi: Take a 0.2-acre site with permission for 40 units with a Gross Development Value of £12m. Deduct 20% of the GDV for profit. That leaves £9.6m. Deduct £7.6m for costs. That leaves £2m. Deduct £0.6m for financing at 7.0%. That leaves £1.4m – the residual value of the land.
• Post Kwasi: Drop the GDV from £12m to £9.6m to reflect the worst of the forecast price falls of 20%. Raise the finance costs from £600k to £900k to reflect the immediate 30% increase in borrowing costs following the Base Rate increases. Result? The £2.4m GDV fall wipes out the £1.4m residual land value, leaving a potential negative figure of £1m.
• Result: Original profit of £2.4m disappears with the 20% fall in GDV. But that’s before more bad news with the increase in finance charges and a no doubt gloomier re-appraisal of construction and exit risks. Is it worth starting up the digger?
A developer fortunate enough not to have bought the land can walk away. A developer who has paid £1.4m for the land using a loan with an interest rate of 8% is on the hook for interest payments of £18k per quarter, and has to worry on how to repay the capital for an asset showing as £1m liability on the appraisal. The unfortunate firm halfway through construction which has spent much of the £7.6 m development loan? Help!
The new-build market share of SME developers has fallen from 25% in the 1990s to 10% today. The government wants smaller firms to help reach the somewhat mythical 300,000 target. During his 49-days as Housing Secretary, Simon Clarke raised one good idea: exempt sites with fewer than 50 units from providing affordable homes – on which only 6%-7% profit is allowed by councils as part of Section 106 agreements. There is also a longlaid plan to scrap Section 106 and replace the tortuously negotiated tithe with an infrastructure tax. This would be collected as a pre-agreed fixed percentage of the actual sales price. Clarke’s idea would lift land values. The infrastructure tax would simplify the appraisal guessing games. Finally why not give smaller housebuilders a boost by fashioning an SME-only Help to Buy scheme? The volume builders have had their fill. Time to help the smaller developers, those, as demonstrated, hit hard by the mini-budget fall-out.
Peter Bill is co-author of Broken Homes, Britain’s Housing Crisis, Faults, Factoids and Fixes. Available from Amazon: https://www.amazon.co.uk/Broken-Homes-Peter-Bill/dp/1800460376