Viability and land value; a housebuilder view from Barratt

Recent research by Shelter looked into the supply of affordable homes in cities across England. It suggested that viability assessments were being used to reduce the amount of affordable homes required under planning rules – and called on the government to tighten up those rules, as part of our Civic Housebuilding campaign to reduce the cost of land. In response, Philip Barnes of leading housebuilder Barratt argues that up to date local plans, which specify what is required of housebuilders, is the key to building more homes.

Barratt is the UK’s largest housebuilder, building more than 17,000 homes over the last twelve months and with a commitment to building even more over the next five years.

We recognise that as a housebuilder, we have an important role to play in building the homes the country needs and over the last five years Barratt has increased the number of homes it has built by more than 55%. But it is also vital that as the quantity increases, the quality of new homes doesn’t suffer.

As we now look to increase the volume of homes we build further we are investing heavily in skills and in land, last year we spent more than £1billion on land, showing our commitment to volume delivery.

However, given recent media coverage two issues have demanded our attention, land value capture and the accusations of developers using the ‘viability’ process to duck their affordable housing obligations. This blogpost gives a personal perspective on those matters.

Land Value Capture

It is stating the obvious to say that if the Government wanted to control and reduce land values that would be supported by housebuilders. But our key objective at the moment is policy certainty and consistency in order to reduce commercial risks. Whilst land value capture appears alluring to many, my view, set down here is that it would be difficult and disruptive to introduce. Indeed, in the short term it would likely reduce the amount of land available for new homes, running counter to Government objectives to accelerate housing delivery.

Perhaps land value capture had more logic when cities were expanding rapidly and the state was concerned about landowners’ land banking in order to maximise future land value. But in recent decades the state has strictly controlled city expansion via green belt policies and, more latterly, the plan-led system. As a result, there are now huge numbers of sites being put forward for development and the state’s role is to choose the best, via the local plan process.

Securing a local plan allocation, and the subsequent planning permission, is a highly competitive and expensive process with no evidence that the ‘winners’ then simply sit on their hands. Barratt does not have a single site with detailed planning permission where we are not on site and building.  Likewise, our business model would not allow us to invest c£1billion in land and then leave that investment in the ground.

Barratt is pleased that the Chancellor resisted arguments to introduce land value capture in the recent budget, and would much prefer the Government to focus its resources on ensuring a greater and more consistent supply of sites coming through the local plan process. With greater certainty on local plan outcomes, risks around land investment would be much reduced. Our concerns are more about some Councils ‘plan-banking’ than landowners land-banking.

Speedier local plan preparation and review would make it easier for Barratt to buy land in full knowledge of the infrastructure, affordable housing and community facilities required by up-to-date local plan policy. Land is always bought pursuant to those policy requirements.

The viability process

Which brings us onto the ‘viability’ process. Namely what happens if the infrastructure requirements, set down in the local plan policy, are so great that either:

  1. The resultant land value is so low that landowner will not sell the site; or,
  2. To meet the landowner’s land value expectation there is insufficient profit to enable the housebuilder to take on the build and sales risks

At Barratt we won’t start a development without sufficient cover to offset build and sales risk. 2008 is a great reminder of what can happen when land investment assumptions are overly optimistic and we won’t repeat those mistakes. While we recognise that profits are good at the moment, we made losses of hundreds of millions of pounds after the last economic crash and were not able to pay a single dividend in the four years from 2009 to 2013. Very few sites are completed without unanticipated build cost overruns and predicting sales values 2-3 years ahead is notoriously difficult. Not many experts were predicting the recent price falls in central London 2-3 years ago.

So if there is no clear policy, and the landowner won’t reduce the land price, and the housebuilder won’t reduce the risk cover (their profit margin), then compromises are usually necessary if the Council is keen to see homes built on the site. Perhaps in relation to infrastructure or affordable housing.

But if the Council has a Community Infrastructure Levy (CIL) there can be no compromise on infrastructure, as the CIL payment is mandatory. Which leaves affordable housing as the only possible flex, especially if the local policy is absent or out of date. If the Council sticks to its guns on the amount of affordable housing it requires, then either the development stalls or the viability process kicks in.

Thankfully, the aforementioned doomsday scenario is extremely rare for Barratt. As indicated earlier we always buy land with both existing and emerging policy requirements in mind, and hence we end up in a viability dispute on less than 5% of our planning applications. We were able to build 3,488 affordable homes last year: that’s 20% of our output and more than any organisation in any sector.

It seems easy to blame developers for ducking affordable housing obligations.  From Barratt’s perspective we will always buy land on the basis of delivering what is required by policy.  If the policy doesn’t exist that can be difficult but we very rarely end up disputing the required level of affordable housing.  Obviously I cannot comment for others.

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