Key factors affecting the marketplace
Growth in construction costs
UK economic/ macroeconomic conditions
Inland Homes has positioned itself typically at the first and second time buyer end of the housing market where demand is very strong and has been largely unaffected by recent changes in Stamp Duty Land Tax.
Our land bank is predominantly in the South and South East of England where demand for housing is the strongest. We promote substantial sites through the planning process and obtain planning consents that would suit housebuilders to commence on site shortly after acquiring it.
The demand for housing in our place of operation significantly outstrips supply and has resulted in house price inflation, although this has now slowed.
Key differentiators of Inland Homes
Inland Homes has a large and growing land bank of 6,936 plots, of which 2,137 have planning consent or a resolution to grant planning consent. The land is predominantly in the South and South East of England where there is continued strong demand from private housebuilders and Registered Providers of affordable homes.
Inland Homes has a clear and agile business model giving us the flexibility to realise value in the land bank through consented plot sales, sales to Registered Providers, housebuilding or rental income from investment property.
Our highly experienced management and specialist development teams have worked together for a long time, enabling the successful identification, securing of suitable land and maximising each project's potential. Our planning team, which has over 85 years combined experience, has a long track record of securing planning permissions across all our sites.
The BCIS Private Housing Construction Price Index has shown that housebuilders have seen cost increases of 5% in the year to March 2017 with materials costs rising due to the devaluation of Sterling and labour costs rising due to an acute skill shortage. The shortage of skilled labour is widely acknowledged as the greatest constraint to increasing the UK housing supply other than the planning system and financial constraints, with 55% of the industry feeling the pressure. A recent survey for CIBSE by Hays showed that construction wages rose by 3.5% in 2016, well ahead of the 1.8% UK average, although this represents a slow down from the 5% -6% seen in 2015. RICS are reporting that the shortage of bricklayers and quantity surveyors is particularly acute with plumbers and electricians not far behind.
- Rising costs in relation to materials will impact on housebuilding profit margins and we have begun to buy materials directly from suppliers rather than via main contractors in order to ensure we are obtaining the best value as well as derive further savings by becoming a bulk purchaser.
- The skills shortage and resulting wage increases will also impact on the Group's profit and we have therefore invested in our own housebuilding expertise as part of a deliberate strategy aimed at addressing the growth in construction costs as well as being part of an expansion programme.
Growth in construction costs
Over the past 5 years the UK economy has steadily improved:
- We have seen a significant population growth
- Unemployment rates have dropped to 4.3% – the lowest since 1975
- Interest rates and inflation have remained very low
- House prices have continued to rise, albeit they have levelled off over the last year
However, the uncertainty over Brexit and the fall of sterling are causing growth to slow down, with the Bank of England slightly reducing its growth forecast for 2018 and indicating that interest rates could increase sooner than previously anticipated. Inflation rose sharply during the first half of 2017 and wage growth has been sluggish, squeezing household spending power.
- Growing populations have an increased housing need which benefits both the Group's land trading and housebuilding operations as well as its residential lettings.
- House price increases directly affect the Group's housebuilding operations but also drives up the value of consented land and is a result of the lack of supply, demonstrating the longer term demand for new housing.
UK employment rates (aged 16 to 64), seasonally adjusted
Demand for housing
There exists a structural imbalance in the housing market with excess demand over supply nationally and particularly in the South East. There is an estimated requirement of up to 275,000 homes per annum. Government policies may help to stabilise house price growth but it remains to be seen if they will increase supply significantly, leaving an expected shortfall of more than 100,000 homes per annum.
Government initiatives – Demand
- Help to Buy – facilitates deposits as low as 5% through an equity loan scheme and represents 44% of Inland's unit sales
- Help to Buy ISA – government contribution of up to 25% of monthly cash savings (up to £50 per month)
- Lifetime ISA – 25% government contribution to savings (up to £4,000)
- Restrictions on pension savings by higher earners – lifetime allowance cut from £1.25 million to £1 million so buy to let provides an alternative investment option despite an increase in buy to let levies
- Starter homes – imposed 20% discount for first time buyers in exchange for reduced requirement for affordable housing
- Planning reform – focus on reducing the time planning applications spend with decision makers. A 'delivery test' is being introduced to ensure delivery of local homes within a reasonable timeframe.
- Permitted conversion of offices to residential – permanent extension of permitted development rights from April 2016.
- Relaxation of building constraints on green belt land – permitted allocation of appropriate small-scale sites in the green belt specifically for Starter Homes, designed for young families.
- Government to provide £5 billion to stimulate housebuilding projects – £2 billion to accelerate construction of homes on publicly owned land, £1 billion of short term loans to small housebuilders and £2 billion of long term funding for infrastructure to deliver up to 200,000 homes.
- Local Authority land release – unlocking large housing sites
- Government's Housing White Paper – plans for 'presumption that brownfield land is suitable for development', higher densities in urban locations with good transport links, better local plans, help for public sector landowners with remediation and infrastructure costs, larger Local Authority planning teams, removing unnecessary planning conditions, address skills shortage, reduce time taken for s106 and CIL agreements, encourage modern construction methods, Help to Buy to continue until at least 2021, £7bn affordable homes programme to build 225,000 affordable homes in this parliament.
Implications for Inland Homes
- This chronic undersupply underpins our sustainable business model for housebuilding, land trading and lettings operations.
- We ensure that we are aware of and in a position to take full advantage of Government initiatives which increase demand, such as Help to Buy.
- Similarly, we participate in initiatives to ease supply by purchasing office buildings to convert to residential; by taking part in the Government's consultation on planning reform and being in constant dialogue with Local Authorities to ensure we are considered when large parcels of land are to be released for housing – this strategy led to our involvement with Southampton City Council on our Chapel Riverside project.
UK Housing demand gap
East of England
Yorkshire and The Humber
Source: House of Commons Library, Housing needs and demand
Net additional dwellings
House prices to 30 September 2017