Q Prospects for development and investment vary across the country, at a local level. To find the best development opportunities, should the same selection criteria be used as for investment?

A To some extent, yes. We expect the markets that are currently strongest to continue to show the highest rates of growth in house prices, rents and land values during the next five years. New homes will generally be sold most easily into markets that have recovered most strongly to date, with least reliance on high loan to value mortgage debt, which remains in short supply.

Q Are all the development opportunities found in stronger markets?

A No. The flipside of investing and developing in stronger markets is that there is more competition to acquire investment stock and land. The higher investment yields available in weaker markets can underpin performance, particularly if growth is driven by the strength of adjacent markets. Conversely, a well-located development site in a weaker market can deliver good sales rates, but with less competition to acquire the land.

Q Where are the best development opportunities in stronger markets?

A Development volumes have bounced back most sharply in the stronger markets, with a 6% shift in housing delivery towards the strongest markets, compared with the peak delivery year of 2007/08.  

Examples are Ashford, South Norfolk (including development on the fringe of Norwich) and Cornwall, underpinned by a robust recovery in market activity and the availability of deliverable land.  

In contrast, delivery in markets such as Oxford, Solihull and Wokingham have stayed relatively low, despite strong market recovery.  Scarcity of deliverable land with consent is a constraint in these markets, so development prospects are good for those who can get land with consent to the point of delivery.  

Other markets with strong market recovery but below par levels of delivery include Mid Sussex, Guildford and York. In London, Islington, Hackney and Wandsworth have delivered less than might have been expected given their market strength.

Q Does NewBuy mortgage indemnity open up opportunities in other markets?

A The upturn in delivery has also been above par in high delivery markets such as Peterborough, Corby, Milton Keynes and Basingstoke, where overall market activity has not recovered so strongly, constrained by scarcity of mortgage finance.

Equity loans, including FirstBuy and Homebuy, have been an important part of delivery rates in these markets, so developers that offer these products are well placed to compete. NewBuy mortgage indemnity has the potential to extend the positive impact.

Q Will the new National Planning Policy Framework lead to more financially viable consents?

A The guiding principle of the new framework is the so-called golden thread of the presumption in favour of sustainable development. The document’s foreword sees planning as a creative exercise in achieving sustainable development, rather than simply an exercise in scrutiny.  

This should, in theory, lead to an increase in the number of viable planning consents, but much will depend on whether the Secretary of State embraces the creative tone of the framework’s preamble, as appeals work their way through the new system.

Among the positive features of the new framework is the requirement for Local Plans to meet the full objectively assessed needs for both market and affordable housing, with reference to market signals of the balance between supply and demand.

This is in contrast to the evidence base for existing policy, which rarely makes use of such market evidence. The addition of such evidence will justify higher housing requirements in some markets, particularly once employment related immigration and travel to work patterns between local authorities have been properly factored in.

A further positive feature is the requirement for the Plan to be based on a financially viable five-year land supply (plus a buffer), whereby policies should not threaten that viability.  

The assessment of viability should, having taken account of the normal cost of development and mitigation, provide competitive returns to a willing landowner and a willing developer, such that development is facilitated throughout the economic cycle.  

This is a clear signal that assessments of Plan viability should represent the reality of the economics of development in the current market. This is potentially the most important section of the new framework, as it should ensure that development is not stifled by unrealistic policy aspirations that go beyond what is required for sustainable development.

Q Are the larger strategic sites now being developed?

A Much of the development opportunity is in strategic sites of more than 250 unit capacity, which provide a total development capacity of 1.5 million new homes nationally.  

These sites account for some 45% of the five-year land supply pipeline identified by local authorities, where specific sites have been identified in Annual Monitoring Reports. Some 53% of their capacity is in stronger markets and many of these are close to higher value markets.  

These sites have been difficult to bring forward since the 2007/08 downturn, because of their greater requirements for both scarce development finance and costly infrastructure. As the steady pace of refinancing of banks and developers continues during the next five years, and market recovery ensues in due course, balanced against higher build costs, then a growing proportion of sites will become deliverable, providing land for the higher number of new homes completions that we are projecting.  Whether this materialises will be a central test of the new National Planning Policy Framework.

Q What about surplus public sector land? Are there opportunities?

A Surplus public sector land is also part of the land opportunity, albeit that much is in mid to lower strength markets. Of the land identified by Government as having a development capacity of 100,000 new homes, 65% lies in the local authorities with below average market strength, so structuring the right land deal and planning consent will be crucial.

Taken from
Residential Property Focus 2012 Q2