Richard Jones, partner at Arcadis, looks at the importance of Help to Buy to the private sales market and the continuing shift in emphasis in the strategies of registered providers as they evolve in the new housing environment
The announcement of the end of the Help to Buy initiative at the end of last year caused a degree of concern before the clarification was provided that it only related to the mortgage guarantee element of the scheme and not the equity loan. The equity loan part will continue to 2021.
The concern was obvious from the housebuilder sector as this market has been significantly underpinned by this government initiative. A broad analysis of the figures shows that since its inception up until September last year in excess of 100,000 homes were bought under the scheme which accounted for more than 25% of all new homes built. It is certainly a significant market intervention. In some instances it was said to have accounted for virtually all sales on site. With 81% of these HtB home purchases being first time buyers it has certainly acted as a significant stimulus for first tier sales which will inevitably stimulate subsequent tier sales – first time buyers are always seen as the catalyst for a healthy overall sales profile.
It has been argued that a consequence of this intervention has been artificial house price inflation which could prove a concern for government as it looks to at least break even on its investment. Currently, based on the 100,000-plus figure highlighted above, government has invested £4.64 billion of equity loans in these properties. One of the effects of removing Help to Buy could be a correction to what many commentators are saying are over inflated house prices, which could in turn reduce the value of the equity investment currently held by government.
We therefore have a market that is underpinned by government intervention or potentially government subsidy should their investment return fall below the value of the original equity value.
Within the context of creating an environment that looks to produce more housing numbers it can be argued that this intervention is exactly what government should be doing. However, I think there needs to be more transparency around whether this is creating an improvement in the numbers and if so in what quantity – as I suspect that a number of first time buyers who are using Help to Buy would have bought anyway irrespective of the support. So without this data it is not clear whether this is a “value for money” initiative or not. Also without this data it is not clear what the impact of withdrawing the initiative would be.RPs and strategic land
I read with interest the recent news that L&Q is looking to purchase the Gallagher Estates £500 million strategic land portfolio which I believe reinforces the view on the direction of travel of these increasingly influential organisations. This type of move positions L&Q in the traditional space of the UK large housebuilders which have always been reliant on a strategic landbank to underpin a sustainable long term housebuilding model. It also recognises that for the majority of these types of developments there are two areas of margin return, that arising from land promotion and that arising from plot development. In many instances the return accruing from the former can be significantly greater than that arising from the latter, although recognising that the former carries with it probably more risk. With the Gallagher portfolio, though, I would suspect that a great deal of value has already been created through the land promotion already carried out – this certainly seems to be the space that the likes of L&Q are becoming more comfortable operating in.
We are seeing similar moves elsewhere where large registered providers are offering themselves as land promotors and dealing directly with farmers and other land owners. I think there is likely to be some momentum for the RPs around this, particularly following the recent Garden Communities Initiatives. There are many areas being identified for new Garden Communities that will require land promotion expertise to bring them to fruition. We are currently in the normal housebuilding cycle where the traditional housebuilder is not buying a great deal of land and is being careful as to what they commit to. I think that this is likely to leave a void for the RPs as they look to become more strategic in their residential development and look to create sustainability around increasing house number targets and an aggressive subsidised business model.
Strategic land does not in the first instance create high house numbers, however once instigated and as part of a rolling programme it can provide, as the business model of Barratt, Persimmon and the likes shows, the backbone of housing numbers that will become so essential to these new “developers".