Redrow revealed

Here‘s a very good piece by Phil Oakley taking an analyst’s view of Redrow.  It’s highly informative and instructive.    He spends a lot of time on their land holdings.  My only quibble is that I don’t really see land under option as being highly valuable for house builders.  The house builders have to pay about 90% of the Market Value to the land owner once planning permission is obtained.  They’ll typically make some money from the exercising their option but the vast majority of the land value uplift will go to the land owner.

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The end of viability assessment?

Well, the DCLG seems to have chucked quite a few (proposed) grenades into the planning system last Thursday in their consultation document Planning for the Right Homes in the Right Places.  The proposed changes to the use of viability assessments in the planning system seem to have really come out of the blue.  Some strong words (my underlining)

Stakeholders have told us that the use of viability assessments in planning permission negotiations has expanded to a degree that it causes complexity and uncertainty and results in fewer contributions for infrastructure and affordable housing than required by local policies…the range and complexity of variables in assessing this are such that the process is seen as being susceptible to gaming; and is often viewed with suspicion by authorities, communities and other observers. In particular, estimating future values and costs can be manipulated to reflect a range of outcomes. Furthermore, appraisals are often not published on the grounds of commercial confidentiality. This means that the process is neither easily understood nor transparent.

The key wording seems to be

We propose to make clear in the National Planning Policy Framework that where policy requirements have been tested for their viability, the issue should not usually need to be tested again at the planning application stage (me again).

Given the “not usually” get-out, then this seems to be proposing to rule out the (ab)use of (biased) viability assessments to justify non-compliance with policy.  However, it’s notable that they are seeking advice on how viability assessments can be improved and made more transparent – perhaps a hint that they will be with us for longer.

It’s interesting that they are also seeking guidance on how to “publicise” the developer contributions secured through s106 and CIL.  I’d certainly recommend that the estimated cash value of planning obligations such as affordable housing, provision of education or health facilities etc.  should be made explicit during a planning application.

For instance, let’s say that 25% of affordable housing is being provided on a greenfield site in the south east of England where density equates to 40 three bedroom units per hectare and the average house price is £300,000.  That’s 10 affordable homes worth approximately £3,000,000.  Assuming that the developer is able to recoup half of the £3,000,000 by selling them to a housing association, that’s still £1,500,000 per hectare secured through planning obligations from affordable housing.  It would be transparent to set out the cash value of any planning obligations at the application stage.

Commercial housing associations?

There’s a very good piece in the FT on the commercialisation of the housing association sector.  I’ve referred to the Dutch experience before and it echoes many of the concerns that are being raised here regarding the UK.

I emailed a Dutch friend of mine to ask about their experience of commercialisation in the inclusionary housing sector.  He summed quite well how greater autoonomy and commercialisation had played out..

There was one big problem that was reported on from the very beginning: there were no clearly defined aims that could be used to judge effectiveness and efficiency and there was no clear demarcation of the field that housing association should cover. So what do you get if you make organisations independent, give them a huge lump sum and do not impose clear socially defined aims? And there were indeed perverse effects such as disinvestments, investments in non-core activities, land banking, lavish financial behaviour by CEOs and outright fraud. It needs to be said, though, that these are obviously mediagenetic events and behaviours, the majority of the housing associations and CEOs were fully aware of their social obligations.    

The FT article suggests that the HCA seem to preparing contingencies for housing associations defaulting on debts, insolvency etc. as they are engaging in commercial development to support (replace?) their social mission.  Up to now, the benign housing market has meant that commercial profits have been usually  subsidising affordable housing provision but what happens when profits turn to losses – as they surely will some day?

Professor of Real Estate Networking?  (HE and RE)

I’ve always felt that, in many business roles, interpersonal and transferable skills can be as important as formal or specialised knowledge (albeit I’ve no empirical evidence and I prefer my surgeon, dentist, optician etc. to be expert rather than charming).  There was an interesting article in the FT yesterday on the skills that MBA employers regard as most/least important.

It’s good to have a survey rather than anecdotal evidence.  The amount of times we get told after someone has met an employer over several glasses of prosecco…Your students need to be better at answering the phone/Excel/spelling/attention to detail etc. or that they need to know more about leases/valuation (Argus)/planning/sustainability/infrastructure or they need more commercial awareness/business knowledge/market nous.  I suspect that different types of employers want different skills and knowledge and often they want a range of stuff.

It also raises the hoary old issue of the blend and balance between vocational training versus an academic education.  Are academics who often have little commercial experience and who have typically specialised in narrow, niche research topics really best placed to transfer broad, close-to-market, vocational knowledge and skills?  There are few academics who have both academic and commercial expertise.  Even if they have, their commercial experience and expertise is often specialist.    I sense that some real estate schools are becoming more like vocational training schools staffed by former practitioners who preach what they practiced rather than academic institutions staffed by researchers and specialists.

I found the results of the FT’s survey pretty dispiriting.

The five most important skills were not core MBA subjects, such as finance and marketing, but more loosely defined qualities, or so-called soft skills, such as the ability to work with a wide variety of people (cited by 76 per cent of employers) and the ability to prioritise (cited by 72 per cent). Of these, employers said the ability among MBA graduates to manage their time effectively was the most difficult to find

The least important skills were marketing, statistical, programming and financial skills and environmental management and CSR.  Financial and marketing skills are the least important to MBA employers!  You don’t need to do a degree to learn how to manage time, network, work in a team etc.  Is this what an academic institution should be about? While I’m ranting, in my experience I don’t tend to get a lot of positive feedback from students when they’re set complex problems.

I’ve just remembered that Cass Business School appointed a Professor of Networking a few years ago.

Uplift in uncaptured land value uplift?

I’m not convinced that she’s got a strong handle on the topic but there’s an interesting article by Judith Evans in the FT today on land value capture.  It relies heavily on two reports by two organisations from different ideological perspectives – the Adam Smith Institute and Centre for Progressive Capitalism.  It’s worth reading the comments on the article to get a sense of the issues and how long they have been central to the debate about planning, land use, housing and taxation in the UK.

Shelter, in research done with the think-tank the Centre for Progressive Capitalism, estimates that £87bn could be ploughed into housebuilding and other infrastructure by local authorities during this parliament if they could take full advantage of land value capture. This sum could be enough to ensure that Britain deals with its housing shortfall, but it is contingent on reform of a little known piece of legislation passed more than 50 years ago. Currently, when local authorities buy land — for example for regeneration projects — they must pay prices that take into account potential planning permissions and infrastructure developments, rather than just the value of the land at its current use. This means councils therefore usually pay inflated prices. The 1961 Land Compensation Act should be amended to enable local authorities to buy land at current use value, according to the Centre for Progressive Capitalism and the Adam Smith Institute. This would put councils in a position of being able to subsequently grant planning permission for housing on the purchased land, and then sell it on at higher prices. They could also enter into joint ventures with developers to build housing on the land, and then sell the homes. Either way, the local authorities could reap the benefit of the uplift to land prices, and use this to fund affordable housing.

A lot of these issues have been discussed in previous blogposts.  However I hadn’t spotted the Centre for Progressive Capitalism’s report.  It’s got a lot of interesting content and is well-worth reading.

In particular, it has attempted to estimate the level of land value capture through developer contributions such as s106 planning obligations (affordable housing, open space, infrastructure provision) and the Community Infrastructure Levy.

I’m struggling somewhat with the methodology – although I may be missing something.  Using a very macro, big picture method based on data on numbers of houses built, land values, densities etc. they estimate that residential land worth c£14.8 billion was developed in 2014-15 in England.  It is estimated that the existing use value of the land was c£2.4 billion.  This produced a land value uplift of c£12.4 billion.  They then deduct sales of public land (approx. £1 billion) and an estimated £2.75 billion worth of developer contributions (mainly affordable housing) to get to approx. £8.6 billion of uncaptured land value.

I think that there is some double counting going on.  The £14.8 billion estimate already incorporates the effect of planning obligations.  If they are using the last estimates of residential land prices, then these are not based on values without planning obligations.  Basically the £14.8 billion reflects the fact that (£2.8 billion of) planning obligations have to be paid.  So – the approach seems to me to be underestimating the amount of uncaptured land value uplift.  It looks to me that there’s still the same amount of land value uplift capture in absolute terms (£2.8 billion) but less in relative terms.  The uncaptured land value uplift seems to be closer to £11.4 billion rather than £8.6 billion.