New Builds Bottom Out in UK

Knight Frank reports that although new builds are expected to trend up slightly in 2012, the overall outlook for construction companies and developers will remain dismal throughout the …

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Knight Frank reports that although new builds are expected to trend up slightly in 2012, the overall outlook for construction companies and developers will remain dismal throughout the year in the United Kingdom (UK). The Eurozone crisis and tough lending restrictions are hampering growth, and critics say the government’s New Homes Bonus program is having little effect. New levies are also squeezing margins, and proposed environmental legislation promises to make it even more costly for builders who are already feeling the pinch from the drawdown in demand. For more on this continue reading the following article from Property Wire.

House builders and developers in the UK expect a small rise in construction this year, but the continued lack of mortgage finance and economic travails in the UK and the Eurozone remain key risks for the sector, according to Knight Frank’s second annual survey of the house building sector.

More than 100 respondents from the industry took part in our survey which shows that nearly a third of house builders expect bank funding to fall further this year, while more than four fifths say that the New Homes Bonus introduced by the government to try and boost planning approvals is making little or no difference.

On the development side, there was a noticeable rise in demand for larger family homes with four or more bedrooms. This reflects the ‘new reality’ of the housing market, with most demand coming from those who have already built up a sizeable equity stake in their home and are thereby less reliant on mortgage funding.

House builders are quite upbeat about the effects of the NewBuy scheme, with two thirds saying that the scheme would result in a slight rise in development volumes, and 70% saying that it should result in a modest rise in sales.
 
However, the number of respondents who felt that the scheme would have a ‘significant’ positive effect was modest, with only 3% saying it would result in a large rise in the volume of sales. Some house builders have also expressed dismay in recent weeks at the high interest rates on such mortgage loans.

The survey also shows that lack of mortgage finance remains the biggest risk to the performance of the house building sector over the next 12 months. Mortgage approvals for house purchases are still down by around 50% since the peak of the market in 2007.

The New Homes Bonus was introduced last year in a bid to encourage local councils to approve plans for new homes. In return they receive a payment matching council tax income for each home built or brought back into use, with an additional bonus for affordable housing.

But the survey shows that in the second year of the bonus allocation, there has been a notable rise in the number of respondents who think that the scheme will have no impact at all on development volumes. Some 80% of those surveyed said that the bonus would have little effect.

The publication of the National Planning Policy Framework (NPPF) in late March provided some certainty over the government’s intention to streamline the planning process in England with its main change being a presumption in favour of sustainable development.

The policies within the NPPF still need to be thrashed out in a local context and as a result the development framework has been less than certain for some time with the exception of London, where the Mayor’s office has retained an overarching handle on development targets.
 
‘Add to this the wave of appeals on Sector 106 requirements in the wake of the financial crisis to take into account the change in development finances and land values, and the result has been a quagmire of expensive and time consuming planning negotiations. The new NPPF will take time to bed down and promises little change to the current situation in the near future,’ says the report.

This is strongly reflected in the survey, with nearly half of respondents saying they thought that the government’s move towards ‘localism’ would actually slow down the process of securing planning permission. Some 54% said that the plan could result in a fall in development volumes from where they would otherwise have been.

There was also disquiet among respondents about the Community Infrastructure Levy, CIL, which is currently being rolled out across the country. Respondents said the new charge was already ‘squeezing margins’. There are growing concerns that this levy could also lead to a decline in the supply of residential development land across the UK.

Increasingly onerous environmental legislation is also troubling house builders. One house builder recently said that the plan to make new homes ‘zero carbon’ from 2016 could add £30,000 to the cost of building each new home.

The responses from the sector indicate that the government needs to do more to meet its housing target of around 200,000 new units a year. Just 100,000 units were completed last year.

This article was republished with permission from Property Wire.

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