All Posts By

Sam Howard

sam-howard-magnet-capital

Opinion: The New Normal in the Development Finance World

By Blog, Development Finance, Opinion

It felt like the chains had been unshackled, as I stepped out of my car, in bright sunshine, at one of Magnet Capital’s development sites last Monday morning. For the first time in over eleven weeks, I was able to do what I enjoy most; visit our projects, see how they have progressed and chat with our developers and their team.

 

Except it wasn’t normal, I was sweltering in a mask and gloves, despite being on an open-air site, with the two bungalows at wall plate stage. I took my position a good two metres away from the developer, whilst the rest of his team were mostly at home, except for two labourers distancing in a corner of the site. Despite all this, the client was delighted to be back on site having lost a good six weeks due to lockdown, closed suppliers and scarcity of labourers. Thankfully roof trusses and windows were soon to be delivered, so that the site could continue with no delays. Roof tiles from Spain were causing an issue but he had a work around and frankly he is one of the lucky ones.

 

Across our extensive range of development sites at Magnet Capital, we have heard of difficulties for developers in getting bricks, block and beams and specifically those building materials, which require bespoke factory settings, such as windows and roof trusses. Factories are starting to open up but there is a backlog of orders. To comply with social distancing developers are faced with having only a skeleton crew on sites, which will be magnified when the properties are watertight and are working on internals. Hand sanitiser, cleaning of surfaces, face masks will all be necessary. Delays and rising costs are a reality for all our developers. As a development finance lender we have to be realistic that our clients projects will overrun their loan period and we need to help them either to extend their loans or source developer exit products.

 

The new normal is also opaque as to what will happen to the property market in terms of house prices and the mechanics of selling new build properties. There will undoubtedly be far-reaching economic ramifications but at the moment there is plenty of pent up demand. The Government’s lockdown measures resulted in an estimated £82 billion of house purchases placed on hold. Some early indications suggest that the market is springing back into life, with Rightmove stating 40,000 new sales having been agreed since 13 May and it saw its ten busiest days ever in May and June.

 

We are all going to be spending more time in our homes and spacious properties with gardens and nice views should be in demand, whereas flats in high rise blocks, requiring lifts and in urban areas with little outdoor space, might struggle. This could be accentuated by people increasingly working from home, with less need to be in urban areas, close to their place of work. The commute will become less of a burden on the psyche and the pocket, if people are working from home a couple of days a week, meaning that more living space, further out of the city centre, becomes much more desirable.

 

Agents will need to find ways to cleverly market their properties, offering virtual imaging cameras to create accurate floor plans and 3D simulations of properties, or filming short video tours inside. Potentially the new build market will outperform the second hand market, as the risks are lower visiting a vacant rather than occupied dwelling. The mechanics of buying and selling is further complicated by the difficulty in the current climate of getting valuations, surveys, searches, and dealing with the Land Registry. Sellers need to get all their paperwork ready and buyers need to ensure that they have a decent solicitor that is not stymied by working from home and surveyors that are willing and able to attend the property.

 

Last week felt like the mist was lifting and a sense of normality is returning, However, all we can do is take each day as it comes, as looking too far into the future of the property market is unwise in the best of times and especially in current times.

sam-howard-magnet-capital

Opinion: Stargazing in the development finance market

By Blog, Development Finance, Opinion

As I sit working from home with the news on a constant loop, the picture is forming of a dystopian world where  from a corporate perspective there will be few thrivers, aside for big tech, and the rest will be competing to be survivors.

Undoubtedly, the world is facing a crisis like we have not seen for probably a 100 years, and the impact on people’s lives has and will continue to be unprecedented in the short term. Reports are suggesting there will be a wave of soured UK commercial property loans, owing to the slump in retail property. Indeed, from the development finance perspective, restrictions on movement, the closing of building suppliers, the effective shut down of the residential property market for sales and rental has and will lead to serious delays. With regards to residential property, I believe this is overly bleak and once a vaccine and suitable drugs have been discovered, the UK’s passion for property will return.

However, whilst running a development business from my home office, in between Zoom calls, reviewing drone footage and photos of our sites, I wanted to do a bit of stargazing to see what changes for the better or worse might affect our industry. Clearly, I have no crystal ball but just a deep interest in the development finance industry.

An argument that is raging at the moment is whether Covid-19 will lead to a rise of nationalism over globalism. Given that the UK imports significant amounts of building materials, with one fifth coming from China, should the UK be focusing on ramping up domestic production? Whether it is electrical wiring, softwood timber, clay tiles, there is an argument that the UK should be fully self-sufficient. My guess is that there will be a significant move to on-shoring capabilities where possible, although of course some countries are better endowed with natural resources than others and we will still import where there is little alternative.

We are all starting to use technology more in our day to day roles, whether that is utilising: valuation software, drones for building inspections, or zoom sign up meetings. Therefore, shifting the belief that development finance underwriting can’t be automated and that the borrowers need to be met in person and the sites visited. With regards to the surveying profession, whilst physical valuations will still be necessary for the majority of development schemes,  we will see a degree of change , with more virtual monitoring inspections. However, this is likely owing to the rise of modular housing that will reduce the need for so many physical monitoring inspections, rather than Covid 19.

From a lender’s perspective no matter how much a system can be automated, you still need a human to make decisions and review the due diligence that the computer programmes produce. Face to face sign up meetings with the borrowers are crucial to assessing the risk of a development project. Yes ,you are also looking at the valuation information, the site details, cashflow, business plans etc but ultimately you are backing the individual/individuals. At Magnet Capital, we will be reinstating this, of course adhering to social distancing rules, as soon we can. So, don’t get rid of those meeting rooms just yet.

Which leads me on to the question of working from home. It is one that the industry has struggled with for many years. The mantra of management has always been, that you need to have your employees in the same physical space, to create the optimal working environment. The reality is that with modern technology it is possible to work efficiently and productively, without being in physical proximity.

Whether using slack, zoom, dropbox, xero, alongside a business’s existing databases, the ability to work remotely is, if not seamless then close to it. Avoiding the daily commute, not being crammed into a hot desk environment with little natural light, and having the ability to work flexibly is attractive. Now, I am not suggesting that office space is no longer needed but I think there will be a realisation that big expensive offices might need another look. It is of course about having the right systems in place and yes it is easier with a small team such as Magnet Capital’s who have all worked together for many years rather than a giant multinational.

The modern office will be reshaped, with perhaps meeting rooms and desks for those who need to be in rather than paying for a space for hundreds of people. And just a thought – perhaps from a residential development finance perspective, there might be opportunity for developers to turn the unused office space into flats.

To borrow a well worn but largely derided phrase in the financial markets that “this time is different” but I think in some ways it possibly could be.

 

sam-howard

The end of the 2010s

By Opinion

As one decade ends and a new one begins, I want to reflect on the 2010s and what has been a bizarre decade from the perspective of the housing market.

The decade started with the property market pulling itself off the floor after the slump, caused by the credit crunch. There had been a dramatic slump in housebuilding, as credit lines were pulled with banks and lenders desperately trying to rebuild their balance sheets. The development finance lender where I worked at the time, was getting calls from prospective borrowers, asking not what our rates were but whether we were lending. We were one of the few funders who still were!

The then Labour government were struggling under the precarious public finances, to be replaced by the Conservative and Liberal Democrats coalition. The next few years were characterised by a housing market that was stymied by a lack of credit both for mortgage market and development. House prices did fall initially but the lack of new homes being built, combined with low interest rates maintained a lack of affordable housing. The political world turned upside down in 2016 with BREXIT, the rise of the hard left and the hard right.

Economically, we had the Bank of England continuing to respond to the ongoing crisis, caused by the financial crash, by keeping interest rates low and injecting trillions of pounds of new money into financial systems to ward of depression. This financial wizardry of quantitative easing, counter intuitively seemed to push up asset prices (including house prices) but failed to create inflation. 10 years on we still have historically low interest rates at 0.75%, and little indication that the economy is in a state for them to be raised significantly.

From a housing market perspective throughout this period, various housing ministers have tried  to fix the housing crisis. It has been a crisis largely characterised by the chronic lack of supply of housing, leading to rising house prices and rents preventing first timers getting onto the housing ladder and private renters facing crippling rent bills. We saw the introduction of “Help to Buy” in various guises, increases in stamp duty both in terms of rates and also an additional levy on second homes, and numerous white papers designed to solve the problem. None of them have got to the root of the problem; which is the need for more new affordable homes. The new Conservative government has promised at least a million new homes this parliament, called for a shaking up of the planning system, and proclaimed that there would be a 30 per cent discount on new homes to local people and key workers. The proof will be in the pudding and I hazard a guess that Boris Johnson might get BREXIT done but will struggle to fix the housing market.

Finally, I thought I would list a few things that I have learnt over the last decade in the short-term finance industry, they are simple but worth remembering:-

Always assess the level of risk and whether you can live with the downside.

To minimise risk aim for numerous smaller deals rather than a few large ones.

Work with experienced and trustworthy people

Know your own strengths and weaknesses and surround yourself by colleagues who have complimentary skills.

Avoid what you don’t understand.

Lend near where you are based so that you know your location or at least if there are problems you can easily visit the site.

 

I wish everybody a very happy and productive new year.

sam-howard

Housing and the Climate Crisis

By Development Finance, Opinion

Walking past the Extinction Rebellion protest in Bishopsgate, a few weeks back, whether you agree with their tactics or not, brought the reality into focus, that our planet is in serious trouble. The onus is on every single one of us to do more and it will require a concerted effort.

Given that Magnet Capital’s focus is to support our SME Developer clients in building the right new build houses in the right places, it is pertinent to shine the spotlight on what new homes can do to help the country meet its target of reducing greenhouse emissions to net zero by 2050. The new and existing housing stock currently accounts for circa 20% of emissions.

Somewhat under the radar, the Government in its 2019 Spring Statement has turned its attention to residential housing emissions by including a commitment that, by 2025, they would introduce a Future Homes Standard for new build homes. This would include low carbon heating and world-leading levels of energy efficiency. The Government has now published a new consultation, setting out these plans, which is open to responses until 10 January 2020. This consultation marks the first step towards implementation of the 2025 Future Homes Standard, proposing to tighten the standards on energy efficiency and ventilation in new homes as of late 2020.

It includes two options:- the first is a 20% improvement on carbon dioxide emissions by ensuring new build houses have triple glazing and a waste water heat recovery system.

The second would result in a 31% improvement which require only double glazing but crucially low-carbon heating and/or renewables such as photovoltaic (solar) panels.

The government’s aim is for the housing industry to develop the necessary supply chains, skills and construction practices to deliver low-carbon heat, and highly energy efficient new homes by 2025. Crucially, it has been rumoured to include the banning the installation of fossil fuelled heating systems in homes built from 2025. Whether this means gas boilers will be banned for new builds is a matter for debate, given there are genuine concerns over whether alternatives such as air source heat pumps are viable because of their high initial cost and current ability to heat a home.

However, what is not in doubt is that new build house builders cannot bury their head in the sand, as the first raft of changes of increased efficiency standards will apply by the end of next year. These will have cost implications for house builders and SME developers need to be aware.

Changes are coming and some will be painful but ultimately we all have to up our game to protect our planet.

 

sam-howard-magnet-capital

The Bigger Issue

By Opinion

Our new Prime Minister, Boris Johnson, is highly skilled at generating headlines and positive soundbites, which certainly generate interest and coverage. However, trying to figure out what his polices are on any particular topic is never easy.

One minute, we are preparing for a no deal Brexit and then next that the odds are a million to one against there being a no deal Brexit. Perhaps, this ambiguity is both designed to confuse the enemy and simultaneously provide backside covering if things go wrong or perhaps it is a clever way of playing the cards he was dealt or more accurately dealt himself.

Anyway, as you know my interest lies in the housing market, so in these early days of the Johnson premiership, I want to try to figure out whether his new government has what it takes to make meaningful change and also hazard a guess at what their policies will look like.

A new Prime Minister heralds a new Secretary of State for Housing, Communities and Local Government. Robert Jenrick is in and James Brokenshire out. Likewise, a new Chancellor, Philip Hammond is out and Savid Javid is in. Savid Javid was a previous Secretary of State for Housing, Communities and Local Government, oversaw the White Paper for Housing on 2017 and has previously spoken about borrowing £50bn to fund new housebuilding. So there are possible clues in a selection of a team that may be inclined to provide the fiscal fire power to invigorate the housing market, whether that is tax cuts and/or increased spending/borrowing.

Boris Johnson has been a long term believer in home ownership. He realises that as a counterweight to Jeremy Corbyn, homeowners will tend to vote Conservative and to appeal to younger voters, he needs to persuade them that the dream of their own home is attainable. So it is not surprising then that Robert Jenrick has already raised the possibility of the controversial Help to Buy scheme being extended beyond its expiry of 2023. This is not the column for an analysis of Help to Buy but it has contributed to the sale of more than 50,000 new build homes a year and clearly does enable first time buyers to get on the market.

In his first week in Downing Street, Boris has talked about abolishing stamp duty on houses below £500,000 and reducing the top rate of stamp duty from 12% to 7%. George Osbourne’s stamp duty increases have arguably achieved the stated aim of taking the heat out of the housing market but have done a lot to clog up the housing market, especially at the higher end, which invariably has trickled down. Tax on transactions typically reduces housing market activity. However, stamp duty is extremely politically charged and any cuts will be seen as a tax cut for the rich. Given that by the end of the week the Conservative government’s majority in parliament might be whittled down to 1, I doubt whether he will risk trying to reduce stamp duty in the near future.

However, these proposed fiscal measures are really only cosmetic if we are to build the number of houses we need in this country. This will take the Johnson government dealing with amongst other things the real skills and materials shortage in the building industry, the effects of Nimbysim and a broken and under-resourced planning system Further, can Britain adopt modular housing, can it create the infrastructure necessary to support this new housing and can it curb the power of the power of the major housebuilders and enable SME housebuilders and local authorities to build the right houses in the right locations. Only time will tell, but to make a real difference will take more than soundbites.

sam-howard-magnet-capital

Quality not quantity for UK housebuilders

By Opinion

Maybe it is because like me, he used to be a lawyer, but I am rather impressed by James Brokenshire, the Secretary of State for Housing, Communities and Local Government. In a relatively short period of time, just over a year, and in a febrile political environment paralysed by BREXIT, he is trying to get to grips with the significant issues facing the Housing Market.

There have been a number of positive steps, including: lifting the council borrowing cap which enables councils to be able to borrow billions of pounds more for housebuilding, changes to the National Planning Policy Framework and the £1bn Housing Delivery Fund to finance small and medium-sized developers to deliver new homes across the country.

He has also pledged to speed up the planning process, which is a quagmire for SME developers who can get tied up for months or even years attempting to get planning. I am not holding my breadth but he wants councils to be able to approve planning applications more quickly under radical new measures to remove bureaucracy from the system. He said that a new accelerated planning green paper, to be published later this year, will dramatically improve the planning process. Let’s wait and see and the reality is that it comes down to ensuring planning authorities have the resources they need to act quickly.

However, it his focus on calling to account the large house builders that has really grabbed my attention, especially on cracking down on poor quality housebuilding and the leasehold scandal.

Last week, he announced that all new-build homes are to be sold as freehold and to reduce ground rents on future leases to zero, in a move to tackle unfair leasehold practices, which has been a shameful exploitation of consumers, with the consequence that their homes will be incredibly difficult to sell in the future.

In terms of housebuilding, the large house builders are able to build large numbers of units at a cost that smaller house builders simply can’t build at, given their economies of scale and the significant preliminary costs involved before construction even starts.

However, it is often eye opening to see the lack of quality in these cookie cutter style housing developments, who often leave new build buyers with a nightmare of faults to fix as opposed to their dream house. The supposed remedy of a 10 year warranty, in reality does very little to rectify snagging and can leave buyers badly exposed.

Mr Brokenshire has been a vocal proponent of building better homes and is considering forcing house builders to sign up to a code of conduct if they want to benefit from the Help to Buy scheme, and is pushing ahead with plans for a New Homes Ombudsman to give buyers of new-build properties greater protection.

In my time in the specialist finance industry running development finance companies, we have literally funded SME developers and builders to construct hundreds of houses. I am struck by the care and attention that SME developers take in their building. It is often the exact opposite of the big housebuilders, where our clients see the houses they build as a labour of love rather than just churning out another unit. This tends to lead to the right houses being built in the right areas and happy purchasers. Don’t just take my word for it – an award winning surveyor who has overseen many developments by both SME developers and big housebuilders said that pretty much every time the quality of houses being built by the client’s of Magnet Capital is superior to the big housebuilders.

There has to be an emphasis in the country on not just numbers of properties being built but the right type and quality of houses in the right place. So, you might not have heard much about James Brokenshire but I think he is doing a good job so far.

 

Sam Howard