Construction in the engine room

by | Aug 24, 2020

It comes as little surprise to hear that the UK economy has just experienced its greatest contraction since the Winter of Discontent in 1979. Frankly, I would have expected to go back to the 1940s for such a grim comparison but that’s still a pretty uncomfortable stretch.

Boris has recently announced a £5bn spending spree on infrastructure projects – historically the go-to sectors to give struggling economies a shot-in-the-arm: road, rail, comms and construction. In his “Build, Build, Build!” speech Boris specifically brings the spotlight onto the housing industry as, arguably, the key driver of post-Covid recovery.

Several routes for building recovery  

It’s little wonder construction is in the engine room. Contributing 8.6% of GDP in 2018, the sector is valued at £413bn – four times the aerospace and automotive industries combined and employing approx. 11.7% of the total UK workforce.

It’s interesting to note some of the areas of focus for the housing sector. In line with one of his electoral pledges, Boris referenced “levelling up” on several occasions – basically, more for ‘the regions’. Aside from addressing the grievances felt by many non-metropolitan areas of having been neglected and left behind, this policy also slots in nicely with the post-Covid phenomena we’ve witnessed of an exodus from the cities (in theory at least).

Intergenerational injustice” was another attention-grabbing soundbite. A new nod to the fact that most young people are now squarely excluded from the property ladder through no fault of their own. Enter a new £12bn affordable homes programme to support up to 180,000 new units over the next 8 years; there’s also extending the Help to Buy scheme until March 2023

Small house builders – recognised in successive government white papers as vital players in housing provision – are to be given an extra £450m for new housing developments. Whilst I think that £450m is a mere drop in the ocean, it’s nonetheless nice that at last there’s some cold, hard cash raining from above onto the SME sector. 

Finally we have the most radical changes to planning regulations since World War Two, intended to make it easier than ever to build the right homes in the right places: greater flexibility and less permissions required for building repurposing; removal of restrictions for demolition and redevelopment projects; fast-track approvals for building upwards…All plans to encourage the high street revival and development in regions beyond London.

Factors to consider

Whilst a little insufficient, the noises coming from Whitehall are at least positive. At Hilltop we’ve been talking for several months now about two key factors that go hand-in-hand with future housing provision.

Access to capital
Cass Business School has reported that the availability of development finance has contracted sharply since the pandemic, as most lenders have shifted their attention from new opportunities to managing existing (and potentially toxic) loan-books. Pre-Covid issues are likely to get worse – capital will become more expensive, more difficult to secure and will cause greater headaches for developers inexperienced in such matters. As mainstream lenders continue their decade-long withdrawal from the market, the onus will fall onto alternative finance as never before and such lenders will need to be in sufficient shape to step up to the plate.

Buyer priorities in the new norm
The pandemic has altered a lot of perspectives. It’s changed the way employers and employees alike view working from home. It’s turned attention away from the cities towards the regions. It’s changed attitudes towards longer but less frequent commuting. It’s brought technology and future proofing to the fore. Local developers must take these new demands into consideration with their projects to ensure viability and the savvy project funder should be prioritising those developers that do.

I believe there will always be strong demand for housing in the UK – be that housing as a necessity, an investment or a lifestyle choice – and economic conditions are unlikely to ever change that. Taking the negligible decline (0.1% year-on-year) in house prices in June, after the ravages of the pandemic, I think it’s fair to say that the market is showing great resilience which will only improve as does the wider economic environment. The moreso with the help of Boris’ Build, Build, Build provisions.

Forward-looking property development finance providers like Hilltop should play a key role in shaping future housing provision, always there to support SME developers adapt to the demands of the new normal, build affordable, desirable homes and continue to invest in a better future. 

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Updated April 2020 - UK Residential Real Estate Market Review 2020
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