A scheme’s viability is fundamentally affected by several core factors including costs and values.
So, what is happening in the market at the moment, and how might that impact viability assessments – and therefore affordable housing contributions – more broadly.
Nationwide’s House Price Index confirmed wider commentary on a further softening of the housing market, with a monthly change of -0.8%, taking annual change from -3.8% in July to -5.3% in August.
In a rapidly decelerating housing market, appropriate adjustments must be made to advertised pricing with consideration given the current market environment and buyer negotiating power.
Historical transaction data in the previous year must be treated cautiously as representing a very different seller’s market environment. We are finding that broadly all viability assessors are in agreement that valuations must be adjusted downwards for this trend, particularly where data is less robust.
There is evidence of a considerable contraction in house buyer transactions (-25-35% 2019-2023, Nationwide), with the largest impact being on detached properties over flats (-30-40% vs -20-25%). Savills and RICS report a majority of surveyors note both decreasing supply and demand in July.
Finance and Mortgage Rates
A lot of this sentiment is driven by the increased cost of servicing debt. A typical first time buyer looking to buy a £300,000 house with a 10% deposit is now looking at an average 6.07-7% 2 year fix, of 5.4-6% for a 5 year fix. This disparity suggests banks expect short term high interest rates to be sustained or increased, with longer-term reductions.
The Bank of England has raised the base rate to 5.25% in Q3 2023. However with initial positive signs of a recent reduction in inflation to 6.8%, policy makers are beginning to make comments that are suggestive of more limited further increases, or at least a pause in the recent sustained increases through 2023. Should the inflationary picture improve further we would expect rates to stabilise, and a more competitive finance environment. However, we do not expect rates to decrease to their previous level.
This has broad implications for demand, as fewer can afford to service debt. This higher risk, higher cost-of-debt environment is impacting viability assessments strongly, with a majority of viability assessors now concurring that a minimum ‘all-in’ rate should be 8-9% rather than historical averages of 6-7%. The size of schemes must also be considered, as vendors are becoming more averse to risk and therefore only higher terms are available for smaller, riskier schemes.
Conversely this is all having an impact on rental values. Increased finance costs for buy-to-let landlords are feeding through into higher rentals in many areas. Many operators are leaving the market and supply has reduced, further bolstering rental growth to c.10.5% annually (Savills).
Build costs have generally settled after a turbulent period over the last two years. However our experience is that the BCIS average data, often used for viability assessments, where site-specific costs are unknown, is reliably underestimating costs when compared against site-specific cost estimates by tenderers or quantity surveyors. Broadly while BCIS rates suggest £1800-2000/m2, QS cost plans have been coming in at 10-20% above this level. It is therefore important, as outlined by the RICS guidance, to obtain site-specific assessments to support any viability study for accuracy.
The UK government recently released statutory biodiversity credit costs, which are substantial. In principle this should encourage onsite delivery as more cost-effective, but where sites are highly constrained, this will be a considerable additional cost which is likely to drive many schemes into non-viability: https://www.gov.uk/guidance/statutory-biodiversity-credit-prices
Until now many providers have been assuming a minimal cost for biodiversity enhancement in line with historic government research. Accurate assessments of the number of biodiversity credits required for a scheme will be a necessary input for viability assessments moving forward.
Conversely, the government has also released a ministerial statement with respect to phosphate/nitrate mitigation, which if borne out in the relevant legislation may reduce barriers to delivery in areas hit by this planning issue. However, many have jumped to conclusions, thinking this is now no longer a factor - this is incorrect. Until the relevant legislation is fully adopted, councils will continue to seek mitigation as usual, with all associated costs. Likewise, even after adoption, this is likely to remain a factor for s106 contributions, but simply with more centralised administration.
Traditionally a reasonably strong element of presales or faster sales periods have been assumed. However, given the prevailing market environment, we are now making much more cautious assessments of sales rates and minimal presales given wider comments from house builders such as Barratt, Redrow and others.
Costs rise, values continue to fall, but rentals remain buoyant due to the demand/supply disconnect.
Overall, we are seeing a massively increased number of enquiries about how to improve site viability or mitigate previously agreed contributions in the new market environment. If you would like to discuss your site’s viability needs, please give us a call today.