Jan 20 – Residential Renaissance

As we leave behind the election, the new government has a range of challenges facing it.  One amongst many is the housing dilemma, in that all parties committed in their manifestos to get Britain building even more.  The delivery of new homes, and the achievement of building 240,000 over the past 12 months, falls short of the accepted 300,000 a year target vaunted as sufficient to meet demand.  Within the house building figures is buried a success story however – the number of commercial to residential redevelopments, driven by “permitted development”.

The latest figures published by the Ministry of Housing Communities & Local Government showed annual housing supply in England amounted to 241,130 net additional dwellings in 2018-19, up 9 per cent on 2017-18.  Within the additional figures for the past year were 213,660 new build homes, 29,260 gains from change of use between non-domestic and residential, 5,220 from conversions between houses and flats and 940 other gains (caravans, house boats etc), offset by 7,940 demolitions.

Some 14,107 of the net additions from change of use were through ‘permitted development rights’ where full planning permission was not required. These comprised 12,032 additional dwellings from former offices, 883 from agricultural buildings, 199 from storage buildings, 69 from light industrial buildings and 924 from other non-domestic buildings.

Current government policy as set out by the last Tory administration is to extend permitted development rights, which is welcome and necessary for improving the supply of new residential units to the market. Waiting for magic to come from modern methods of construction will take longer than next year’s pantomime season.  This is more likely to marginally reduce the cost of construction question than deliver short-term scale.  The extended permitted development rules would initially apply to purpose-built blocks of flats from January 2020, but if continued would be rolled out to detached houses. These would allow homeowners to add an extra two-storeys to their homes without seeking planning permission, under the same rules that currently apply to small extensions and loft conversions.  It will be interesting to see if the new regime wants to continue down this road.  It is not without risks, particularly in ensuring that the property remains fully mortgageable.

Further extensions are necessary if house building targets are to be met.  Indeed, the Bank of England projections suggest that growth in housing investment has dropped significantly in 2019, to just 1 per cent from an average of 2.75 per cent between 2010 and 2018. It is only projected to rise by 1.75 per cent in 2020.  But, where these homes are developed raises questions relating to resale and secondary market valuations that should be considered by both lender and borrower.

Where these are urban re-generation projects then it is likely that demand is sustainable.  However there are some in industrial areas where the risk of the units looking less attractive five years later is significant.  As this sector expands in scale and popularity, as profit margins are positive, surveyor valuations will need to have empathy with longer term implications.

As with the impact on values of poorly written contracts around estate and management charges, the industry needs to protect its reputation better.  The introduction by some developers of rapidly escalating or unlimited costs for freeholders to maintain roads and public spaces cannot be in anyone’s interests.  These practices need to be curtailed or the rapid march of regulation will be the only show in town.  The relaxation of planning rules and the inability of local authorities to invest in infrastructure means that the industry must effectively self-regulate or risk destroying an already weak reputation.

Robert Sinclair
December 2019