Spring Statement 2018: Property industry offers mixed verdict as housing takes centre stage

By James Wallace - Tuesday, March 13, 2018 16:17

Chancellor Phillip Hammond’s inaugural Spring statement could be characterised as aiming for a “less is more” approach. But for the UK commercial property sector, it was a mixed verdict about what was and what was not said.

Hammond’s move to a single fiscal statement in the autumn was an attempt to provide the business sector with greater certainty ahead of future financial year’s, bringing the UK in line with other European governments ironically at a time when the UK edges closer to a political separation.

“The UK was the only major European economy to make hundreds of tax and spending changes twice a year and major international organisations and UK professional bodies alike have been pressing for change,” explained chancellor of the exchequer, Phillip Hammond.

“I won’t be producing a red book today, Mr Speaker, but of course I can’t speak for the right honourable gentlemen opposite,” in the first gag of Hammond’s speech drawing laughter throughout the House, referencing the time when shadow chancellor John McDonnell brandished a copy of the Little Red Book of the Chinese communist leader Mao Zedong during his response to the November 2015 Spending Review.

Key highlights included:

• New economic and fiscal forecasts, including revised GPD, inflation and public borrowing forecasts from The Office for Budget Responsibility;

• an update on the £44bn housing investment programme over the next five years which was initially announced in the autumn budget 2017;

• initial findings of Oliver Letwin’s review of the planning system and its impact on housing;

• bringing forward the next business rates revaluation from 2022 to 2021, and thereafter to three yearly revaluations for Business Rates;

• announcement that government is inviting bids from cities across England for the remaining £840m of the £1.7bn earmarked in the last budget for improving transport in English cities.

Economic and fiscal forecasts

Hammond began with the customary macro overview. Describing himself as “positively Tigger-like”, the chancellor told the House the UK economy had grown every year since 2010 in the longest unbroken run of growth for 50 years, before announcing The Office for Budget Responsibility’s revised five-year GDP forecasts.

In 2018, UK GDP has been upgraded 10 bps to 1.5%, following which 2019 and 2020 remain unchanged on November’s forecasts at 1.3%, but thereafter the OBR is now more bearish on the medium-term outlook, reducing the outlook for UK plc’s GDP by 10 bps in both 2021 and 2022, to 1.4% and 1.5%, respectively. In sum, the slight improvement this year is outweighed by slight decreases in the later years.

“To be clear, against a long-term trend of at least 2% a year growth, after poor growth since 2008, and compared with growth across rest of OECD, these are not encouraging forecasts,” tweeted Paul Johnson, a director for the Institute For Fiscal.

“Forecasts are there to be beaten,” insisted the chancellor.

Hammond also said the OBR expects inflation to fall back to within the 2% target over the next 12 months and announced lower forecasts for government borrowing which he said represented a “light at the end of the tunnel” in tackling the UK’s debt mountain.

John Hawksworth, chief economist at PwC, said: “The OBR expects the UK economy to remain in the slow lane of global growth for some time to come. In particular, the OBR has stuck to its view that productivity growth will remain relatively subdued over the next five years.”

The OBR also reduced its public borrowing forecast for 2017/18 from £49.9bn in November to £45.2bn, but this revision was below expectations.

“Public borrowing in future years is also expected to be slightly lower than expected in November, but the differences are small and the OBR attributes them primarily to temporary cyclical factors, rather than any material improvement in the underlying structural deficit, “continued Hawksworth. “Indeed, the structural budget deficit is estimated to be just £0.3bn lower in 2020/21, the key target year for the chancellor, than the OBR forecast in November. So the chancellor's comfort margin in meeting his deficit target is essentially unchanged at just over £15bn.

"With limited change to either growth or borrowing forecasts, there was no particular economic reason for the Chancellor to make tax and spending changes and, as expected, he chose not to do so. But he did hint that he might consider some carefully targeted increases in spending in his Autumn Budget. That will depend, however, on the public finances continuing to improve at least as fast as the OBR projects and on no nasty shocks from the Brexit negotiations."

The perennial UK housing challenge

Probably the most significant development for the property sector at large was the update on the government’s new housing investment programme as well as the release of the initial findings of Sir Oliver Letwin’s independent review of the planning system and its impact on the build out rate of new homes.

In the autumn budget 2017, an investment programme of at least £44bn over the next five years was announced with an ambition to raise the supply of homes to 300,000 a year on average by the mid-2020s.

Today’s Spring Statement confirmed:

• the government is working with 44 areas on their bids into the £4.1bn Housing Infrastructure Fund to help build the homes that the country needs;

• the Housing Growth Partnership, which provides financial support for small housebuilders, will be more than doubled to £220m;

• London will receive £1.67bn to start building a further 27,000 affordable homes by the end of 2021-22.

In addition, the government confirmed that an estimated 60,000 first-time buyers have so far benefitted from the government’s abolition of stamp duty for first-time buyers of homes under £300,000, announced in the last autumn budget.

“Today’s statement shines further light on how the government will seek to deliver 300,000 homes per annum. Last week, there was a raft of welcome planning announcements, but delivery will also require land and infrastructure,” said Melanie Leech, chief executive of the British Property Federation.

The Mayor of London, Sadiq Khan, welcomed an extra £1.67bn of investment in genuinely affordable homes in London but not without criticism. In a statement he said the government had “failed to rise to the challenges facing Britain over the uncertain year ahead”.

Colliers’ director of planning, Jonathan Manns, said the earmarked London “is another small step in the right direction”. He added: “However, the fact that the chancellor felt the need to stress this would include social rented homes again underlines the difficult balance which must be struck between the total volume of new properties built and extent to which they are genuinely affordable.”

Overall, the absence of a major housing policy shakeup in the chancellor’s statement today is precisely what the industry needed. A point observed by Matt Tooth, chief commercial officer at LendInvest. “Rather than wasting time adapting to the step changes we’ve become used to seeing, lenders and developers alike can get on with what they do best, getting more homes built across the UK.

“This is a clear opportunity for industry and government to get the funding mechanisms that are already in place, such as the Home Building Fund and British Business Bank, working harder to increase the supply of much needed capital to SME homebuilders around the country.”

Sir Oliver Letwin’s land banking independent review initial findings

Sir Oliver Letwin’s initial findings of the planning system and its impact on housing was published. Back at last autumn’s Budget, Letwin was appointed to undertake an independent review into the build our rate of the UK’s housing market. The scope of the review was initially set to explain “the significant gap between housing completions and the amount of land allocated or permissioned in areas of high housing demand and make recommendations for closing it”.

In a letter to the chancellor and secretary of state for housing, Sajid Javid, published immediately following the Spring statement, Letwin explained that the early focus of review of industry so-called “land banking”.

Letwin wrote in the letter addressed that many witnesses have conveyed that the rate of build out of large sites is typically held back “by a web of commercial and industrial constraints” including:

• limited availability of skilled labour;

• limited supplies of building materials;

• limited availability of capital;

• constrained logistics on the site;

• the slow speed of installations by utility companies;

• difficulties of land remediation; and

• provision of local transport infrastructure.

Letwin wrote that while each of these reasons deserved and will receive further investigation, he was “not persuaded that these limitations (which might well become biting constraints in the future) are in fact the primary determinants of the speed of build out on large permitted sites at present”.

He wrote: “They are components of the velocity of build out; but they are not the fundamental rate-setting feature. The fundamental driver of build out rates once detailed planning permission is granted for large sites appears to be the ‘absorption rate’ – the rate at which newly constructed homes can be sold into the local market without materially disturbing the market price.”

Letwin wrote his review will investigate the broad constraints identified to build out rates. “I shall investigate what effect faster build out rates would be likely to have on the 'land banks' held by the major builders. And I shall continue to seek views from industry participants, planners, NGOs and others on the possible answers to the questions in order to deepen the analysis published in June.”

Industry response to Oliver Letwin’s initial findings

Sarah Fitzpatrick, partner at law firm Berwin Leighton Paisner, said the tentative Spring statement suggests government still “fumbling in the dark”.

“Letwin questions whether such large-scale sites are the best mechanism for delivery. He also questions whether the need for market housing to cross subsidise affordable housing on large sites is slowing down housing delivery. It’s surprising that this is news to the government. Interestingly, Letwin has ignored for the moment the contribution made to housing delivery by small and medium sized housebuilders and the absorption rates of smaller sites.

“Casting developers as pantomime villains makes good headlines but the issues with housing delivery are far more complex and the chancellor’s tentative message today suggests the government is still fumbling around in the dark over what it can actually do to increase housing delivery.”

By contrast, the BPF’s Melanie Leech, was more optimistic of Letwin’s focus. “We are pleased with the direction of travel of Sir Oliver Letwin’s review of land build out. The approach he is taking is very well-reasoned, and we believe a part of the solution is a more multi-tenure approach to large sites, including build-to-rent, which is firmly under his microscope.”

Business rates

The chancellor announced that he is “helping businesses by bringing the next Business Rate Revaluation forward to 2021 and that revaluations would then be every three years rather five”, enabling “a fairer reflection of rental values”.

Gerry Biddle, business rates expert at Deloitte Real Estate, said the chancellor’s move on business rates revaluations “would make the system more responsive to economic changes and ensure that business ratepayers’ bills are more quickly aligned with economic circumstances. In order to achieve three-yearly revaluations, it is likely that there will be a move to a self-assessment system.”

CBRE’s Tim Attridge, head of London rating said: “One reason to bring the revaluation forward is to avoid a clash with the 2022 election and perhaps gives an indication of the government’s intent to run a full term,” said at CBRE. “We would like to see the chancellor go further and simplify the current appeals mechanism allowing businesses to rectify errors with current rates bills. This need is further exacerbated due to the cuts in staff at the VOA who will now have the added task of preparing for a revaluation, alongside rectifying values on the previous 2010 rating list and the current 2017 list.”

But Colliers and Knight Frank were less charitable in their assessments. “This is all very well and good,” says John Webber, head of business rates at Colliers International, “but it does nothing to help those businesses, particularly the retailers who are struggling with the system today.”

Webber points to the number of retailers who have been suffering from their higher rate bills following the 2017 revaluation with some posting lower financial results and others either cutting their number of stores or even going into administration – such as Toys R Us and Maplin earlier in the month. “The pain is not just being felt in the retail sector, as the problems of Prezzo, Jamie’s and Byron well show.”

“Business rates is obviously not the only reason retailers, pubs and now casual dining restaurants are struggling, “says Webber, “but it certainly is a factor. Toys R Us was struggling with a rates bill of £22m a year and it finally went down because it could not pay a £15m VAT bill. Some businesses, particularly those in London, saw massive rises in their rates liabilities, some of which they needed to pay last year, but with the second big uplift coming this year, in addition to a 3 % inflation rise, they will be knocked for six.”

Keith Cooney, head of business rates at Knight Frank said: “It is beyond hyperbole to state the chancellor has completely ignored the plight of the high street businesses and the crippling levels of business rates which have extinguished household names on a weekly basis.

“His answer on how to address the uncompetitive position in tax between ‘click’ and ‘brick’ was to ignore it. Instead we have been informed that the chancellor will bring forward the next revaluation from 2022 to 2021 and he will change the period of the revaluation cycle from five years to three.

So, what is the solution? Colliers calls for a proper business rate review as seen in Scotland undertaken by Ken Barclay last year, looking at the multiplier and the whole system of reliefs and who funds the system. “In 1990, the multiplier was 34p in the pound. It is now 50p, which means an effective 50% property tax. This is not sustainable for many businesses, particularly when it comes on top of the most dramatic Rating Revaluation (2017) of the century.”

Colliers calls for Business Rates reforms including:

• an increase funding for VOA in order to deal with existing appeals’ backlog;

• the release VOA from pressure exerted by local councils and HM Treasury;

• the introduction of a register of appeals professionals – removing the ‘cowboy’ element;

• the root and branch reform of current business rates exemptions and reliefs.

“We need a proper Ken Barclay-type review into how we avoid the business rates deserts and the retailers’ demises that are becoming more and more prevalent. We call for a grown-up discussion and debate about the best solution going forward, not the “head in the sand” approach” that the Government has demonstrated to date. Today's Spring Statement was sadly no exception.”

Infrastructure investment – local authorities’ proposals for £840m

“Recognising the cost to the UK economy of congestion on British roads (c. £9bn per annum), £1.7bn was announced in the Autumn Budget for improving transport in English cities, said Mark Charlton, head of UK research at Colliers. “Half of this has been allocated to Combined Authorities with mayors. The government is now accepting bids from English cities for the remaining £840m. The resulting infrastructure spend could result in new relief roads and the subsequent release of land parcels ripe for development. This could provide opportunities for the development community - both residential and commercial (retail and logistics).”

James Wallace is a freelance consultant and can be reached via WhatsApp on 07825 382670 or email: jawallace32@gmail.com




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