Will Labour Change Permitted Development?
One of the problems with committing predictions to print is that it’s a high-risk strategy. Events will naturally overtake you, and one could easily end up with egg on one’s face if you call things incorrectly. It’s far safer to avoid making any predictions at all. But where would be the fun in that? So, in this article, I’m going to be living dangerously and taking a wild punt or two.
Now, housing may not be the sexiest or most emotive policy on the political agenda, but it quite rightly usually features towards the top of every party’s priority list at any given point in time.
That’s because we have a chronic housing shortage in this country of an estimated 1.5 million homes, and despite the previous government suggesting that we should be aiming to build 300k new homes each year, we’ve never been able to get close to that number. The big question is, what will the new government change to tackle the housing crisis? And if you’re a developer, what is this likely to mean for you?
Let’s start by looking at what the two leading parties promised in their manifestos. Labour said that they plan to build 1.5 million new homes during their first term, while the Tories opted for 1.6 million over the same time frame. Labour have discussed several approaches that they feel will unlock these new homes. Firstly, they introduced the concept of the ‘grey belt’. Now, I’m colour-blind, but even I was able to work out that this is simply green belt land that lies next to brownfield areas. Labour believes there is a swathe of car parks, petrol stations and other previously developed land conveniently sitting on the periphery of our towns and cities that are ripe for redevelopment. There seems to be some doubt as to how many of these grey belt car parks etc. exist, and several commentators have stated that they’ve struggled to locate them on the map. That said, the principle is not unreasonable; if we’re going to encroach on the green belt, it probably makes sense to build where it immediately abuts existing built-up areas.
Labour has also suggested that creating new towns will be crucial to reaching their target. New towns became popular in the 1950s and 60s, with Milton Keynes being the largest and arguably most successful example. Unfortunately, our most recent new town, Northstowe in Cambridgeshire, remains only partially complete, despite construction starting over six years ago. Even if it were to be finished, it would only generate 10k new homes, a relative drop in the ocean. One of the other commitments that Labour made was to deliver more affordable housing, and they indicated that a substantial proportion of their new-town homes would be affordable ones. The challenge here is a commercial one. Developers are currently required to deliver affordable homes at cost. If the proportion of affordable homes they are required to deliver on a site is high, then this either makes projects uneconomic or means that the other homes they build on that site will need to generate more profit and will therefore be more expensive.
The Tories took a different approach to solving the housing crisis. While there have been many overtures about planning reform, the harsh reality is that it is notoriously difficult to build new homes in significant volume without overhauling the planning system and running the risk of alienating voters. After all, everyone wants the housing crisis solved, but nobody wants any new homes built in their own backyard.
The Conservatives’ approach was positioned as something of a win-win. The CBRE had reported that around 1.2 million new homes could be built using unused brownfield sites. These are the empty shops, offices, industrial premises, and the like, which can be found all over the country. And most of these sit within our existing towns and cities, and would be ripe for conversion into residential homes. The previous government changed the rules surrounding permitted development to allow a significant majority of these buildings to be converted into residential use more easily without the need for full planning permission.
You can see why this should be a vote winner. The policy involves no green belt development; it effectively recycles existing buildings that are already well-located for residential homes. Further, this regeneration will bring more people to live in the centres of our cities and towns, rejuvenating them while reducing the eyesore of empty premises that currently blights so many parts of the country.
One of the questions I have seen and heard a lot about in recent weeks is, ‘What will the new government change when it comes to permitted development?’ To give some context, it’s important to understand how the business models of the various protagonists in the development space work. At the top of the tree, you have your large-scale housebuilders, such as Barratt and Persimmon, who essentially have a very simple model. They take large sites of empty land on which they build housing estates of various sizes using variations of existing house designs. It’s a cookie-cutter model; their teams know exactly what to build and how to build it. Aside from planning risk, their critical risk variable is whether they encounter any issues in the ground that could add cost or difficulty to their construction plans. Aside from this, all other elements and logistics are fairly standard, irrespective of where in the country they are building.
Mid-sized housebuilders also tend to do new-build developments, albeit on a smaller scale. This just leaves smaller developers, and their model is usually a lot more flexible. While some will look to do new builds, many will prefer to look at conversion projects, i.e. taking existing commercial buildings and turning them into residential units. The key point to recognise here is that the large and mid-sized housebuilders have neither the skills nor the appetite to tackle small conversion projects. They wouldn’t generate sufficient profit, plus it would mean creating a bespoke solution for every project. It would also involve working with existing buildings, something that their teams have no experience of doing.
So, who exactly are these small-scale property developers? Well, they’re typically entrepreneurs or businesspeople who are very happy to target six-figure profits from each development rather than the seven-figure or eight-figure profits demanded by the larger players. Because they can leverage local teams of professionals such as architects, contractors, and project managers, they have the flexibility to devise solutions for converting existing properties. They don’t have a cookie-cutter model because they don’t need one; they’re not building enough units to make it necessary.
These small-scale property developers are the only people who can convert the existing brownfield land that could unlock 1.2 million new homes.
No one else is putting their hand up. Historically, small developers accounted for around 30% of all new homes. Today, that figure stands at around 12%, and the new government will need to make it as easy as possible for these developers to convert these unwanted buildings into new homes and to encourage more new developers to enter the fray.
So, what exactly does our new government need to do? Well, the first thing to realise is that whichever tool is used, permitted development or otherwise, there’s a need to make the conversion of unwanted commercial properties into residential as straightforward as possible. That said, there will always need to be checks and balances. Developers should never be given carte blanche to convert buildings without prior approval from the local authority. However, approval needs to be provided in a timely and reasonable manner. At present, local planning authorities view permitted development as a challenge to their authority, and the starting point is all too often, ‘How can I refuse permitted development applications?’ rather than ‘How can I permit them?’
One of the key points that the new government should realise is that the most important factor for these entrepreneurs is not planning approval per se but being able to access the finance needed to purchase and develop these projects. Commercial lenders typically advance up to 70% of the purchase price and 100% of the development cost for a project, giving developers incredible financial leverage. But they’ll only do this once the developer has secured permitted development prior approval or planning permission. If these prove too difficult for the developers to obtain, then the risk becomes too great, the money will not be forthcoming, and they’ll look to other investment areas to get their returns. Planning certainty allows developers to unlock the finances that enables them to develop these schemes, and it’s essential that the new government understands this.
This is particularly relevant when we look at affordable and social housing. The new government is clearly going to be championing this area, but it needs to make sure that it takes a balanced view. It could change the permitted development rules so that every scheme must contain affordable housing, but if that makes poor sense financially to developers, they won’t build. At present, developers provide affordable housing at cost, and there may be scope to introduce a refinement where affordable homes through permitted development can generate reduced profits for developers rather than no profit at all. This will ensure that schemes are still viable and that these new homes get built.
Another factor that will impact developers is the cost of acquiring these buildings. Many landlords believe that there is a premium to be had by selling to developers, and they inflate the prices of their properties accordingly. If developers are required to build more affordable housing, it simply reduces how much they can afford to pay for such host properties. This will be a level playing field because the rights will apply to everybody. As a result, there’s likely to be a squeeze on the value of commercial properties that are ripe for conversion.
So, will Labour change permitted development? The answer is almost certainly ‘yes’, and that’s because any new government will want to put its own stamp on housing policy to demonstrate that its own ideas produced results rather than those of the previous incumbent. The problem for Labour in making any wholesale changes is that there’s no silver bullet. These buildings are the most logical starting point for creating new homes in our towns and cities. Yet only one group of developers is capable of delivering the result. Rather than permitted development being viewed as a Tory concept, I would expect Labour to tweak and enhance the permitted development rules and processes to help unlock the substantial number of new homes that could be delivered through this route.
What are these tweaks and changes going to be? Sir Kier and Co are playing their cards close to their chest. It seems logical for affordable and social housing to be featured, and I expect them to focus on the severe shortage of investment and experience within the local planning authorities, an area which has been chronically undervalued and underfunded for way too long.
One of the big challenges facing the new government is that the housing crisis is virtually unsolvable at a party level. That’s because a wholesale overhaul of our planning system will not produce significant benefits within the current political term. Unfortunately, that then predictably leads to policy short-termism. No government wants to be left on the cusp of an election in five years’ time with a planning system still in the throes of change, since things might get considerably worse before they get better.
This is housing’s biggest challenge. Ultimately, it needs to be taken out of the party-political arena and dealt with at a cross-party level by the government over multiple terms. Until we address this particular elephant in the room, all any government will be able to do is paper over the cracks. We can keep running the same old car, patching it up and polishing it so it just about goes and looks vaguely presentable. But ultimately, there comes a time when enough is enough, and a new vehicle, while expensive, is needed to ensure we can reliably get from A to B. And that time is now.