Providing strong foundations?
Posted by: Titlesolv

The Government's proposed planning and housing sector reforms attempt to address the housing shortage, but what do they signify for housebuilders and what are some of the corollary implications for funders and solicitors who act for these parties? The general sentiment of housebuilders, as reported in the press, is that they are concerned the reforms do not go far enough and aspects of the reforms could, potentially, be financially damaging. The feedback from the financial sector is that the buy-to-let market will be stifled, as will the growth in housing association stock – both vital markets for niche lenders. Attempts at radical legislative reform may usher in a greater probability of legal challenges.

 

These reforms do however bring significant benefits to the property industry. By removing obstacles and speeding up the planning process, developers will be able to initiate and build developments with the benefit of less scrutiny and reduced scope for objection to development applications.

 

The Government proposes to allow the future Mayor of Greater Manchester and the Mayor of London to push through complex brownfield developments and promote Compulsory Purchase Orders (CPOs). As more and more sites become consented within a ‘zonal’ system which prioritises development of brownfield land first, we may also see a rise in contaminated land issues. CPOs can be used to acquire rights to light – or to remove the right to an injunction for infringement of rights to light however CPOs are also subject to judicial/statutory review. The removal of the need for planning permission to extend a property up to the height of the adjoining building in London may well give rise to the use of rights to light as a pre-emptive tactical manoeuvre against development and more restrictive covenant challenges.

 

Currently many developments are authorised through obtaining approval to an application for planning permission – something of a ‘one size fits all’ mechanism. Pressure to meet housing targets is replacing this with a variety of pathways for obtaining planning approval, which will complicate the planning system. This will be a challenge for local authorities whose planning departments have to cope with significant reductions in resources. Uncertainty and lack of confidence in the new planning regime may see judicial review, as well as a rise in enforcement of covenants and other title defects as a means of blocking development. This may increase the need for title insurance to protect housebuilders and their purchasers.

 

As well as these potential legal implications, there may also be financial issues for lenders and housebuilders. As buy-to-let landlords exit the market, as a result of the proposed changes to their tax relief, niche lenders may see a decrease in the overall size of the market. More sophisticated buy-to-let landlords may also move their holdings into corporate vehicles which require lending above their thresholds.

 

Housing associations will also suffer as result of reforms which extend right to buy to their properties and are expected to cause rent degression. According to the Financial Times,Housing Associations build one in five of all new homes in the UK. The way in which they finance construction programmes is to borrow against future rents. The Office for Budget Responsibility says the drop in guaranteed rental income is likely to lead to housing associations plans to build 14,000 new homes. The National Housing Federation says the figure is closer to 27,000.”

 

Housebuilders have had a difficult time during the recession with their share prices recovering as a result of careful balancing of demand and supply, which in turn protects the value of their land banks. A glut in developable land may well devalue their land banks, meaning it is unlikely they will rush out to develop more units. Even if they do so, the end result may lower building standards, as builders use cost of sales margins to offset retail margins.

 

If the effect of the reforms on the lending market is reduced lending capabilities then niche lenders will need to look towards cost savings, perhaps by using insurance to reduce title diligence transaction costs. If housebuilders are looking to maintain profits, they will need to pursue the sites which have the potential to generate the highest margins; these sites will most frequently be found in green belt areas where local communities are more likely to generate judicial review, title and other challenges.

 

The debate over the right to housing, social housing and the profitability of the housebuilding sector is an ongoing one, but lying at the heart of most of the Government’s proposals is a genuine desire to promote productivity. As is stated in the policy document: “An effective land and housing market promotes productivity by enabling the economy to adapt to change, helping firms to locate where they can be most efficient and create jobs, and enabling people to live and own homes close to where they work. Housing starts fell by nearly two-thirds between 2007 and 2009, and the number of first time buyers fell by more than 50% between 2006 and 2008…An excessively strict planning system can prevent land and other resources from being used efficiently, impeding productivity.

 

In some ways the reforms will “fix the foundations”, as the Chancellor puts it, but economic realities faced by housebuilders, lenders and investors is ultimately what will build on those foundations.

 

Titlesolv is a trading name of London & European Title Insurance Services Ltd authorised and regulated by the Financial Conduct Authority.

 

 

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