The UK government’s plan to fix the country’s housing crisis contains some nuggets for lenders, but has failed to generate much excitement.
It arrived on Tuesday at long last, greeted by a slow hand clap. The UK government’s twice-delayed housing white paper – Fixing our Broken Housing Market – was promised by communities secretary Sajid Javid as a “radical” solution. Critics dismissed it as a damp squib.
Many argued that although the government has made some of the right noises about fixing the acute undersupply of homes, its plan lacks any bold steps, such as an overhaul of the planning system.
But for lenders eager to finance the UK residential sector, what are the takeaways?
One is that the Conservative government has given up on Margaret Thatcher’s dream of creating a property-owning democracy in favour of encouraging a market that also provides purpose-built private rented sector stock as an alternative.
UK PRS has become a target sector for many lenders, although the issue remains sourcing deals in a nascent market. The government has now focused on encouraging greater safeguards for renters, through measures such as longer-term tenancies. This will make new-build rental apartments more attractive to some occupiers, provide institutional backers of build-to-rent schemes with more certainty of income and thus encourage more development and therefore financing opportunities.
Randeesh Sandhu, chief executive of alternative lender Urban Exposure says he was generally underwhelmed by the white paper, but added there were positive elements, including proposed time-limits on developers sitting on sites without starting construction and greater help for small and medium-sized builders to access loan finance.
“We’ve done a lot of business with joint ventures between SMEs and local boroughs, and there can be issues. For instance, if a council wants priority over the land it can put lenders’ security at risk,” says Sandhu, who adds that a more SME-friendly regime would be helpful.
Other lenders argue that the government is not doing enough to encourage development of for-sale residential schemes by failing to make life easier for independent buy-to-let investors. Simon Brooks of Investec Structured Property Finance, for instance, argues that stamp duty and tax treatment of buy-to-let landlords is a concern for lenders.
“A developer of a large-scale scheme needs to demonstrate to a potential funder that it can de-risk the project with pre-sales,” he says. “The problem is that buyers need large deposits, owner-occupiers struggle to raise these deposits and that the biggest source of capital is wealthy people with surplus cash who will purchase units as buy-to-let investments.”
Brooks recalls the boom years leading to 2008 when debt-fuelled developers peppered city centres such as Leeds with speculative new-build apartments which failed to sell and were eventually sold-off cheap. Developers and lenders remain cautious as a result, mitigating their risk with off-plan sales.
The UK’s housing crisis is a complex one and the country’s housing needs and the commercial needs of lenders are not one and the same. Lenders will always seek the highest-value schemes in the best locations, but while a thriving PRS market and successful for-sale apartment schemes in places like London and Manchester will provide some with roofs over their heads, such schemes will not be found elsewhere.
The bottom line is supply. If developers are encouraged to build and supply-constraints ease, then home ownership becomes a more realistic prospect as house prices drop, and rents also drop, allowing people to save for a deposit. In the meantime, schemes are developed and lenders are able to lend.
With its blanket reluctance to allow for greenbelt land development and failure to meaningfully overhaul a dated planning system, it is difficult to see the white paper lead to boosted supply. For the time being, tight housing supply, rents that prevent people saving deposits and house prices which freeze many out, look set to continue