Housing and Planning Bill

Written evidence submitted by igloo Regeneration

1 Introduction

The Housing and Planning Bill includes provisions relating to Custom Build.

This evidence provides background for Parliament on Custom Build housing.

As a number of authoritative studies have observed, the UK housing market has relatively high barriers to entry, a limited number of dominant participants and business models that limit supply and inflate prices.

igloo are taking forward the only larger scale pilot Custom Build site with HCA in Cornwall as a ‘proof of concept’ for this new approach (for the UK) to housing delivery and are bringing forward an initial portfolio of sites for Custom Build, with a variety of sources of development finance, in Glasgow, Sunderland and Nottingham.

Custom Build is not self-build. The Housing Minister defined it in October 2014 as follows: ‘The definition of "self-build" covers someone who directly organises the design and construction of their new home, while "Custom Build" covers someone who commissions a specialist developer to help to deliver their own home.’ Not a perfect definition but a workable one.

There are many forms of Custom Build.

The three principle forms (all of which can cater for groups as well as individuals) currently operating in the UK are;

1) Individual Custom Build where a small builder delivers a single home to an individual’s design either on a site owned by the customer or the builder,

2) Custom Build Development where a Custom Build Developer secures the site and planning and offers a basic house type with scope for customisation (eg Inhabit, Fairgrove, Modcell, Urban Splash, HAB) and

3) Custom Build Enabling where an enabler secures the site, planning permission, mortgages and a panel of HomeManufacturers and then delivers and markets the serviced plots (eg igloo, Cherwell).

The igloo Custom Build Enabling model is a bit like buying a car. The Custom Builder (customer) picks their plot (fixed price, first come first served), they then select their HomeManufacturer from a panel, choose their house model (small, medium or large), customise the design with the HomeManufacturer who then secures reserved matters planning permission and building regulation approval and delivers the home.

While many HomeManufacturers use modern methods of construction this need not be the case and traditional methods are equally applicable. Homes can be detached, terraced or apartments.

This paper seeks, partly from the basis of study of overseas Custom Build markets but mainly from the experience of a UK development business and an emerging Custom Build market leader engaged with other similar businesses, to explain how Custom Build can play a large part in increasing new supply in the UK Housing Market.


2 Executive Summary

1) The UK Housing Market is made up of a large number of weakly connected neighbourhood markets mainly because most purchasers are tied to a particular location and on average move less than 3 miles and only once every nine years.

2) There are rarely more than a single speculative volume housebuilder selling in one neighbourhood market at a particular time.

3) 75% of the population will not buy a new home from any volume housebuilder.

4) Speculative volume house builders build at a long term average rate of around 2.6 sales per month per site outside London. This slow absorption rate is due to the very small number of prospective purchasers for any particular speculative volume housebuilder standard house type in a particular location.

5) The available evidence suggests that while sub market rental has the highest absorption rate (speed of finding occupiers), market rental is around ten times faster than market sale and Custom Build is around 3-5 times faster than market sale.

6) In other developed countries, on average, around half of homes are Custom Build or self-build and they build on average about double the number of homes per head of population.

7) 53% of the UK population would like to build their own home at some time in their lives (12%/7 million people in the next 12 months) but only around 10,000 succeed.

8) Around 10% of this market want to do the full ‘Grand Designs’ self-build approach. Around 12% are happy with the minimal choice offered by a speculative volume house builder. The remaining 78% of prospective new home buyers are not catered for in the UK currently.

9) In the UK self-build amounts to around 10% of new home production and there is virtually no Custom Build.

10) To be viable Custom Build requires sites in excess of 100 plots (to achieve an optimum balance between consumer choice and HomeManufacturer returns on investment).

11) Regulation in the UK has been designed around the predominant supply model, speculative volume house building. This has created a number of barriers to innovation and market entry that have been comment on by bodies as varied as the Office of Fair Trading and the Lyons Housing Review.

12) The current and previous Governments, with all party support, have sought, to date unsuccessfully, to reduce the barriers to Custom Build.

13) This lack of success is based on a lack of understanding by both policy makers and public delivery agencies of; the economics of the UK housing market, Custom Build business models, the relative competitiveness of different supply models, barriers to entry and innovation and how to remove them to encourage a new supply sector to emerge while developing existing supply mechanisms.

14) This paper sets out 12 enabling technical changes covering the Self-build and Custom Housebuilding Act, the Housing and Planning Bill, the associated secondary legislation, education, mortgages, planning policy and guidance, public land and the role of the Competition and Markets Authority that will open the Custom Build sector to investment, market entry and innovation.

15) There is the potential to double overall housing supply (to a level sufficient to meet the UK’s housing needs) over a period of time determined by the pace, effectiveness and design of Government action to remove barriers to entry and by the pace of investment flow into the various supply models.

16) Custom Build alone could be delivering 15,000 – 60,000 homes per annum in around five years’ time.

17) At this scale we expect Custom Build to deliver a 10% larger house for 10% less cost.

18) Custom Builders build homes that are substantially more environmentally sustainable (energy efficiency and renewable) than speculatively built homes.

3 Statistics

1) The UK Housing Market is made up of a large number of weakly connected neighbourhood mainly because most purchasers are tied to a particular location and on average move less than 3 miles and only once every nine years (Champion).

2) There are rarely more than a single speculative volume housebuilder selling in one neighbourhood market at a particular time.

3) 75% of the population will not buy a new home from any volume housebuilder (RIBA).

4) Speculative volume house builders build at a long term average rate of around 2.6 sales per month per site outside London. This slow absorption rate is due to the very small number of prospective purchasers for any particular speculative volume housebuilder standard house type range.

5) The available evidence suggests that Custom Build is around 3-5 times faster than market sale (Holland).

6) In other developed countries, on average, around half of homes are Custom Build or self build and they build on average about double the number of homes per head of population.

7) 53% of the UK population would like to build their own home at some time in their lives (12%/7 million people in the next 12 months) but only around 10,000 succeed (IPSOS Mori).

8) In the UK self build amounts to around 10% of new home production and there is virtually no Custom Build.

9) Around 10% of this market want to do the full ‘Grand Designs’ self build approach. Around 12% are happy with the minimal choice offered by a speculative volume house builder. The remaining 78% of prospective new home buyers are not catered for in the UK currently. They want an easy way of custom designing a home based on a standard template with a spectrum of requirements for customisation including internal wall layouts (room sizes and number), external elevation treatments (including windows and doors) and internal detailing. (Dutch Planning Association)

4 Custom Build Enabling Business Model (HomeManufacturers)

10) To be viable Custom Build requires sites in excess of 100 plots (to achieve an optimum balance between consumer choice and HomeManufacturer return on investment). HomeManufacturers require on average a minimum of around ten to fifteen homes per site in order to recover the individual site set up costs and make a reasonable profit (they typically require a profit margin slightly above a builder (say 5%) but substantially below a developer (say 20%) because they don’t have sales risk or a significant requirement for capital (as they are paid in stage payments before they have paid their suppliers).

11) To give customers sufficient choice to meet the range of customer types, without giving them so much they suffer from the paradox of choice, requires somewhere between about five and fifteen HomeManufacturers per site.

12) Custom Build using the enabling model is disadvantaged compared with speculative volume house builders by the lower scale economies of multiple lower volume HomeManufacturers but advantaged by the lower profit margin on the construction of the house and in some situations by CIL exemption.

5 Relative Competitiveness of Different Housing Supply Models

13) Speculative volume house building derives its competitive advantage primarily from scale economies and access to capital.

14) Custom Build derives its competitive advantage primarily from providing customer choice with lower levels of developer risk and capital employed (currently also supported by CIL exemption).

6 Government initiatives

15) NPPF – The NPPF requires local planning authorities (LPA) to ‘plan for… housing based on….the needs of….people wishing to build their own homes’. It requires LPA’s to produce a Strategic Housing Market Assessment which ‘identifies the scale and mix of housing… which addresses the need for…people wishing to build their own homes’.

16) Planning Policy Guidance - this sets out how that need should be identified as follows: People wishing to build their own homes

The Government wants to enable more people to build their own home and wants to make this form of housing a mainstream housing option. There is strong industry evidence of significant demand for such housing, as supported by successive surveys. Local planning authorities should, therefore, plan to meet the strong latent demand for such housing. Additional local demand, over and above current levels of delivery can be identified from secondary data sources such as: building plot search websites, ‘Need-a-Plot’ information available from the Self Build Portal ; and enquiries for building plots from local estate agents. However, such data is unlikely on its own to provide reliable local information on the local demand for people wishing to build their own homes. Plan makers should, therefore, consider surveying local residents, possibly as part of any wider surveys, to assess local housing need for this type of housing, and compile a local list or register of people who want to build their own homes."

17) Community Infrastructure Levy - There are further provisions to exempt self-build and Custom Build from Community Infrastructure Levy. This is known as the ‘self-build exemption’ and includes Custom Build as described in the planning policy guidance ‘The exemption will apply to anybody who is building their own home or has commissioned a home from a contractor, house builder or sub-contractor. Individuals claiming the exemption must own the property and occupy it as their principal residence for a minimum of three years after the work is completed.’ For Custom Build this requires each plot in a planning application to be a separate phase and also creates an unattractive repayment obligation for Custom Builders in the event that their personal circumstances change in the three year period.

18) Pilot Projects – the HCA is taking forward 11 pilot projects. Ten of them are for less than 15 units reflecting the confusion in the public sector at the time between self build and Custom Build and the lack of understanding of the business models. The pilots were also frequently either on difficult sites or as small elements of sites being sold to speculative volume house builders. They have generally been of limited success. Igloo are taking forward the only large pilot in Cornwall where the Bristol office of HCA has a good understanding of Custom Build.

19) Vanguard Authorities – These 11 areas have focussed mainly on self-build with some, like Teignbridge, producing planning policies (allocating 5% of each site to self-build with no Custom Build allocation) which are damaging to increasing supply through Custom Build. Only two of these, Cherwell and Sheffield, have included Custom Build and both are struggling to deliver scalable Custom Build models quickly.

20) Custom Build Loan Fund – This £30m fund launched in 2012 was narrowly focussed on Group Custom Build and does not appear to have been either fully spent or evaluated. It had a cap of £3m per project which excluded Custom Build at scale. It no longer exists.

21) Custom Build Serviced Plots Loan Fund – This £150m loan scheme provides up to 75% debt funding for servicing sites that already have planning permission and are owned by a Custom Build enabler. Uptake has been slow and the interest rates used tend to be expensive for SMEs. It is about to be rolled up into the Housing Delivery Fund after little more than a year of operation.

22) Housing Delivery Fund – This newly badged loan fund announced in the Spending Review is likely to include monies previously announced for the funds above but the Custom Build element will no longer be ring fenced although HCA is engaging with the industry in relation to Custom Build.

23) Right to Build – In the Self Build and Custom House building Act 2015 the Government gave local authorities the duty of creating a register of people wanting to build their own homes and of taking this register into account in their housing, planning, regeneration and land disposal policies. Draft secondary legislation introducing the registers (from end March 2016) is currently being consulted on. A significant concern about this approach is that its ‘opting in’ nature for buyers together with lack of publicity for registers and potentially a fee charge will create a perception of low Custom Build demand when compared to the overall demand for new homes. The vanguard authorities are seeing tiny numbers (on average 80 per register in three months but with most of these in one authority) signing up to registers compared with the Ipsos Mori style survey data.

24) Housing and Planning Bill – This introduces an obligation to provide planning permission for sufficient serviced plots to cater for the number of people on the register. This measure is likely to help increase local authority awareness of Custom Build but is also likely to confuse and potentially divert attention from the pre-existing NPPF and PPG requirements. It may also be open to abuse by speculative house builders securing permissions under these provisions but not then delivering serviced plots.

7 Barriers to Entry and Innovation

25) The primary barrier to entry is the difficulty of attracting finance to an unproven (in the UK) concept allied with the significant capital requirements of land purchase, planning and infrastructure provision. Some house builders are considering adapting their business models. A small number of local authorities are also attempting to be Custom Build Enablers on publicly owned land.

26) Related to this is the availability of appropriately structured mortgage finance. The volume mortgage providers have difficulty adapting their computer systems to stage payment mortgages. The small providers are naturally conservative and unable to scale up rapidly. The current approach to regulation also appears to give an excessive risk weighting to stage payment mortgages.

27) A secondary barrier to entry is access to land. A substantial portion of permitted land (there are currently over 500,000 plots with planning permission) is owned by speculative volume house builders. However this is unlikely to be a UK wide barrier in the short term as the small amount of capital investing in Custom Build will find sufficient public and privately owned sites to purchase. It will be a barrier in individual neighbourhood market where the available sites of a viable scale with planning permission will often be entirely owned by a speculative volume house builder.

28) A related barrier is the nature of public sector developer framework panels and their associated legal documentation. These panels (most of which igloo is a member of) are used by public land owners to avoid the expense and timescale of other forms of OJEU compliant procurement. The legal documentation is entirely written in a way that disadvantages Custom Build Enablers compared with speculative volume house builders. Indeed it is written in a way that results in the slowest possible housing supply. And the Government target ‘to release enough land for 150,000 homes’ doesn’t incentivise speed of supply through procurement.

29) Barriers to innovation are multiple. There are regulatory, cultural, financial and other barriers. Intellectual property is also difficult to establish in this area.

30) Regulatory barriers to innovation include the tax system eg VAT, SDLT and the CIL exemption which all require complex structures to approximate the treatment achieved by speculative volume house builders. The planning system, despite the policy and guidance, is not operating to designate suitably sized sites to meet the consumer demand for Custom Build.

31) Industry culture is also a significant barrier to innovation. Few firms are innovative and the multiple agents in the development process eg landowners, planners, valuers, lawyers, mortgage providers are all rewarded for not making mistakes which results in a very substantial resistance to change. And the nature of the development process means that just one of these actors can frustrate an entire innovative project.

8 Enabling Innovation, Market Entry and Housing Supply Diversity

32) The primary policy objective is increasing housing supply. One approach to this is to increase the diversity of the supplier base and this requires building new supply sectors like institutional market rent and Custom Build.

33) The work of economists like Ha Joon Chang on emerging markets gives some ideas of how this might be achieved. Many of Government’s policy measures are designed (inadvertently or otherwise) to deliver this protection of an emerging sector although it does not appear to be well informed by the potential participants.

34) As the Custom Build sector grows and investment flows there will need to be policy tests for the withdrawal of protection (eg CIL exemption) to provide the stable investment context (by removing or mitigating political and regulatory risk) early investors will require (in contrast to the chaos wreaked in sectors like renewable energy and housing associations).

35) By engaging with the active participants Government can identify the key technical changes necessary to increase investment flow and also better understand the trigger levels at which the industry will achieve self-sustaining competitive position through scale economies.

36) For example, where HomeManufacturers are delivering annual volumes of say 500 homes per annum it is likely that they are achieving scale economies. If there are ten of these it is likely they are delivering consumer choice (so long as there are at least five on each site). So 5000 homes per annum with this industry sector structure might be a trigger for the removal of CIL exemption.

37) The relative lack of competitiveness of institutional market rent means that it is likely that this will be limited to large buildings or large sites in relatively low sales rates locations although Government action to level the playing field with non-institutional Buy to Let will increase the universe of competitive situations for institutional market rent.

9 Scale of different delivery methods over time

38) The growth of the Custom Build sector is hard to forecast given the large number of variables including the speed and effectiveness of Government action that are difficult to forecast. The market is a non-linear, complex, dynamic, evolving system so forecasting is unlikely to be accurate and policy should focus on creating the conditions for growth rather than predicting or targeting an unpredictable future.

39) However we can draw parallels from other countries. If CIL exemption, combined with public sector land delivered specifically for Custom Build and privately owned sites designated for Custom Build and adequate loan funding via the Housing Delivery Fund can be delivered together the remaining variables are market and standard regulatory forces.

40) Our analysis suggests that it should be possible to build a number (say five to 20) of enabling businesses delivering say 3000 homes per annum over a five year period. This would result in a Custom Build sector output of 15,000 to 60,000 homes per annum subject to local plans continuing to maintain a five year housing supply.

41) At this scale we anticipate that Custom Build will be delivering on average 10% larger homes for 10% less cost. Custom Builders also specify on average more environmentally sustainable homes.

10 Recommendations

42) Housing and Planning Bill – In clause 8(1) the anti-avoidance provision needs strengthening by the inclusion of a definition of person that includes related persons and companies to avoid companies who own land in one vehicle but build mainly to their own specification in another. This is less an issue for the current legislation where the definition only relates to the eligibility for entering names on the register but it will be of great significance if repeated for other purposes, for example in planning permissions.

43) Housing and Planning Bill – In clause 9(6)(c) the words ‘could include’ are used. This opens up the risk the sites that are not subsequently developed for Custom Build ‘use up’ the requirement to grant permissions under the Bill without delivering the plots to the market. These words should be replaced by the words ‘that must be wholly used for’ to at least ensure that the initial, likely to be three year duration, permission is exclusively for Custom Build.

44) Housing and Planning Bill – It is not clear to us that clause 9 will work to match the grant of serviced plot permissions to the number of entries on the register (or even whether it is necessary given the provisions in the NPPF and PPG that should (but aren’t currently) result in a greater number of allocations for Custom Build (because demand will be much greater than the opt in names on the register that most people won’t know about and which they may be charged to enter). It is likely that many of the permissions granted won’t be developed for Custom Build (as many housing permissions are not implemented) and that people on the register will find plots elsewhere or choose a different housing route. About the only thing we can be certain of is that a mismatch will rapidly develop with significant potential to bring the whole system into disrepute. We support the register simply as a blunt instrument to get local authorities attention on to Custom Build but we believe it is likely to be ineffective and potentially counterproductive to meeting the real demand in the medium term.

45) Self Build and Custom House Building Act secondary legislation – The secondary legislation concerning registers will shortly be published. The experience of the pilots is that the numbers signing up to the register will be substantially less than the effective demand for Custom Build. The secondary legislation should therefore not require anything other than the name and address of the person (this should include an email address) ie no local connection, requirement for a fee or to prove financial standing etc. A single national register would make the publicising of the register more cost effective and it would be better funded by Custom Build enablers, HomeManufacturers and developers buying data and advertising rather than the prospective Custom Builders. Using registers to enable communication between all providers of serviced plots and customers is critical.

46) Housing and Planning Bill secondary legislation – the secondary legislation needs to minimise restrictions on what amounts to a plot for the purposes of the duty to grant planning permissions (particularly if this definition gets used in other circumstances), to minimise exemptions (there are virtually no authorities for whom Custom Build is an impossibility though mismatches between supply and names on the register will occur from time to time) and to minimise the ability of local authorities to restrict eligibility to frustrate the purpose of the register.

47) Education – The most effective tool in promoting Custom Build supply is education. We see daily examples of all levels of government confusing self-build with Custom Build for example which results in policy making that frustrates the ability to scale up Custom Build supply. We see similar examples amongst the industry institutional framework and supply chain including public land disposal, planning and market participants eg valuers, planners, lawyers, strategic land promoters and consumers. We believe this will transform as the first projects come forward beginning in 2016 and there will be a critical for role of price signals (eg in buying land) as well as for publicity across all media. This would be a cost effective way for Government to accelerate supply.

48) Mortgages - capital risk weighting – The Prudential Regulation Authority doesn’t recognise Custom Build (or self-build) in its recent supervisory statements and Custom Build has limited default data sets (although lenders anticipate that default rates are likely to be lower than for self-build and overseas evidence suggests they may even be below those of completed owner occupier mortgages). It is important for Government to play a role in dialogue with the PRA to ensure appropriate risk weightings for Custom Build stage payment mortgages.

49) Mortgages - Lender computer systems appear to be the main constraint to an effective volume Custom Build lending market. Standardising stage payments and processes and encouraging market entry from volume providers not yet in the market eg Nationwide would be helpful in levelling the playing field with speculative housing as the sector starts to grow.

50) Emerging sector enabling – Growth of the sector needs to be enabled by Government in an intelligent way to overcome the existing, mainly regulatory, barriers to growth. CIL exemption is a good example of this approach (but it requires streamlining with the removal of the need for individual plot phasing in planning permissions and substantially more flexibility in the potential repayment requirement. The sector may also require Competition and Markets Authority protection from speculative volume house builders via a watching brief (to avoid for example any similarities with the early history of electric cars or US trams – where the incumbents buy up and close emergent competitors etc)

51) Planning policy guidance – Intelligent practical guidance, which needs to evolve over time as the sector grows, is needed. Initially this needs to advocate whole large sites for Custom Build. Legislative change (ideally through the current Housing and Planning Bill) may also be required to allow officer delegated reserved matters approvals in short timescales (1-3 days) for reserved matters (or technical approvals) applications in accordance with plot design codes, planning permissions in principle and local or neighbourhood development orders.

52) VAT – Custom Build currently has to use complex Golden Brick structures just to achieve close to parity with speculative volume house builders and self-build. This should be simplified to remove the regulatory burden that generates no revenue.

53) Public sector developer frameworks – The standard legal documentation for these frameworks and other forms of land disposal and developer procurement eg GLA, HCA does not allow Custom Build. Custom Build versions of these documents are required and procurement practice needs to evolve to increase the weighting to speed of completions through diversity of supply mix.

December 2015

Prepared 14th December 2015