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Cover feature: Will new-build crumble?


The new-build sector has been growing steadily but issues over ground rents and the future of Help to Buy could shake its foundations 

The launch of the Help to Buy equity loan scheme in 2013 lay the foundation for a much-needed reconstruction of the new-build sector.

The market has rebuilt itself in recent years, with 2016 seeing the highest number of new-build starts since 2007. It is no longer plagued by accusations of over-valuations or improper use of incentives.

Are cracks beginning to emerge though? Could the recent scandal over ground rents, an ongoing skills shortage and uncertainty over the future of Help to Buy all cause the sector’s recent growth to halt?

Structurally sound

Barratt Developments head of mortgage lender relations Adrian MacDiarmid says its number of home completions has risen by more than 50 per cent over the last five financial years, with some 17,300 being built last year.

“The market generally has become more positive, with strong Government support for the sector and excellent mortgage products,” he says.

Figures from the Department for Communities and Local Government show there were 153,370 new-build starts in the year to December 2016, up 5 per cent on 2015. During the same period, completions totalled 140,660, a decrease of 1 per cent compared with last year.

Lloyds Banking Group head of housing development Douglas Cochrane says, overall, the new-build sector is going strong. “We are seeing some regional variances, with areas of London looking more challenging, as reported by many London-centred developers.”

He says despite this solid demand, consumer confidence could see a natural hiatus due to the uncertainty in the run-up to the general election. The Government is currently trying in earnest to bolster the market and build the 250,000 new homes a year it believes are needed to meet demand.

In February, Communities Secretary Sajid Javid launched its Housing White Paper. The paper outlines plans to help speed up planning permissions and encourage small independent builders back into the market. It also wants to hand more responsibility to local authorities and encourage the building of more homes for affordable rent.

Leeds Building Society corporate account manager James O’Reilly says while the white paper discusses a broad range of ways to increase supply, it gives little detail on how this will be achieved. He would like to see the current political campaigns debate how more homes can be built more quickly.

“Modern Methods of Construction is one potential solution,” he says. “These are being used more frequently and we will lend on such properties, subject to valuer’ guidance and the property holding the appropriate MMC certifications and new-build warranties and guarantees.”

Long memories

The market has come a long way from a few years ago, when it was dominated by just a couple of lenders. Legal & General Mortgage Club new-build manager Craig Hall says there are now at least a dozen mainstream lenders supporting new-build and about half a dozen smaller lenders working on their proposition.

He can understand why some lenders are still cautious towards new-build though. He believes the introduction of the Council of Mortgage Lenders’ Disclosure of Incentives form in 2008 and surveyors having access to better data have both helped the sector.

But he says: “Lenders’ risk departments have long memories, especially if they were left with a lot of overvalued new-build flats in 2008/09.”

Mortgage Advice Bureau new homes director Andy Frankish says new-build has a slightly higher risk factor due to the properties being new and often in areas that have been regenerated. But he says: “We do think more lenders should look at 95 per cent LTV, there is still too much difference between the new-build and second-hand market.”

MacDiarmid says there is still work to be done by both developers and lenders.

“Homebuilders need to redouble their efforts to ensure the transparency of transactions is beyond doubt,” he says. “Equally, we would like to see lenders consider whether their maximum LTVs are a fair reflection of the risk of lending to a customer in a post Mortgage Market Review world. This is particularly so on flats, where many lenders still require a 25 per cent deposit.”

Ground rents

Something which is not currently helping the sector’s image is the recent scandal over inflated ground rents. Towards the end of 2016, reports emerged of certain builders selling on freeholds to private companies, some of whom have been imposing unfair ground rents on borrowers.

London & Country associate director of communications David Hollingworth says a ground rent may start out at £250 per annum but after it has been doubled every 10 years over 50 years, a borrower with a £150,000 house could end up paying £8,000 a year in ground rent.

“Mortgage lenders may find the property is not fit for a mortgage or the valuer may say it’s not eligible because its marketability is reduced with such a significant ground rent attached to it,” he says.

Cochrane says the publicity around acceptable leasehold and ground rents has resulted in more enquiries as to what constitutes a reasonable level of charging.

“We are working closely with the Council of Mortgage Lenders, the Home Builders Federation and DCLG to provide further clarity and consistency,” he says.

Nationwide recently announced a crackdown on unreasonable ground rents. It now stipulates that the starting ground rent must be no higher than 0.1 per cent of the property’s value, with a minimum lease of 125 years for flats and 250 years for houses. It wants the ground rent to be “reasonable” and any increase linked to an index such as the Retail Price Index. The Government and political parties are also understood to be working on measures to tackle any abuses of leasehold.

O’Reilly says, “It’s important that all stakeholders act quickly to bring the relatively small number of issues under control and thereby protect the broader industry reputation.”

Redrow group chief executive John Tutte believes those involved in the practice have stopped. “It’s become extremely topical and political and you can understand why. I expect it’s not going to go away easily but I don’t feel it’s really the scandal people are making it out to be – other than in a few cases.”

Help to Buy

A further issue where the sector is looking to the Government for clarification is what will happen in 2020 when the Help to Buy equity loan scheme ends. Between its launch in April 2013 to 31 December 2016, 112,338 properties have been bought through the scheme.

Tutte anticipates the scheme will remain in place after 2020 but might be reworked. Currently under the scheme, the Government will lend up to 20 per cent of the cost of a new-build (40 per cent in Greater London) so borrowers only need a 5 per cent deposit and a 75 per cent mortgage to make up the rest.

Tutte says, “I think the Government is conscious of the fact you can’t just cut it off overnight and transition arrangements need to be in place.”

He is hopeful the market may end up with a permanent scheme, possibly consisting of a lower Government loan size or a lowering of the maximum purchase price – currently £600,000.

Frankish say its important the market receives some clarification from the Government.

“Builders are looking to buy land today that might not be ready to build on until 2020. They’re not going to buy confidently if they don’t know that Help to Buy is still going to be there.”

Skills shortage

Tutte says the biggest issue facing the sector is not the possible end of Help to Buy or ground rents but a lack of skilled workers. He says in some cases, this has limited the amount of new homes it can build.

“The industry is suffering from a skills shortage,” he says. “For me, it’s at the forefront of my mind and we are looking to the Government to address it as quickly as it can. There is also the issue of Brexit and uncertainty over EU labour.”

He does not think the industry has been as good as it could have been in advertising the benefits of a career in housebuilding, with schools tending to focus on academic qualifications rather than technical skills.

MacDiarmid estimates some 350,000 construction workers left the industry during the downturn. “We are playing our part in this, having recruited over 600 graduates, trainees and apprentices in the past two years, but much more must be done to attract new talent,” he says.

As demand increases, another area that could potentially be left with a shortfall is the adviser market. Frankish says brokers should not be “scared of new-build”.

“Most big builders have their own panels and it can be very difficult for brokers to get on to them,” he says.

“The Government, however, is trying to encourage small builders back in the market and give them access to the same products as the bigger ones. There is an opportunity for regional brokers here to work with regional builders, something we are trying to encourage with our members. “

Hall says as other areas of the mortgage market contract, such as buy-to-let, it will free up capacity in brokerages. He says: “For those businesses asking where the business is, new build is clearly an area of growth.”

While the Government is occupied with its white paper and the much publicised issue of ground rents, its attentions also need to be focused on attracting more builders into the sector. Otherwise, its efforts could be in vain if there is no one to lay the bricks to grow the sector – its builders.

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