Navigating the viability conundrum was the topic of discussion at our third roundtable last week; one of a series intended to share ideas and insight to tackle the big issues impacting development.
We gathered a range of experts from the likes of Savills, Cushman & Wakefield, Greater Manchester Combined Authority (GMCA) and Bolton Council to discuss why the industry isn’t delivering the number of homes we need and what can be done to solve the issues stalling development.
The figures are stark – the UK has seen a 66% drop in housing development starts since 2023 and a 40% fall in apartment starts since 2020. There remains an inadequate focus on high-rise development and the role it will play in tackling the housing crisis, despite the fact that the government targets 40 homes per ha while apartments deliver 3-5 more units per acre than single family housing. At the same time, the viability gap continues to halt development – 60% of stalled residential schemes cite viability as the primary cause as rising costs outpace sales values.
Alongside a lack of recognition around the value of high-rise residential projects, developers face a barrage of hurdles, from regulatory pressures such as the Building Safety Levy and Future Homes Standard through to delays in negotiating S106 agreements. Such is the level of disruption caused by the Building Safety Regulator (BSR), some developers are now looking exclusively at non-BSR schemes, which will have a long-term impact on the delivery of new homes across the UK.
Simultaneously, construction costs have continued to increase, with developers now spending around 25% more on fabrics, according to Ilyas Patel, Director at Russell Bolton Consulting (RBC).
Patel also highlighted the skills gap, saying “We’re just not building enough and the skills gap is a major issue; there aren’t the people to build 300,000 homes a year.”
Land availability is also impacting viability, though the industry has dismissed allegations of land banking. Hannah Gradwell, of Cushman & Wakefield, said: “There is little evidence of land-banking – developers are being thwarted by a range of factors, including the BSR, finding a contractor and the cost of debt.”
The viability gap continues to impact projects in Manchester, but by all accounts, the landscape is trickier still elsewhere. Savills’ Adam Mirley highlighted the challenges in getting schemes to stack up in cities like Bristol, Leeds and Liverpool and the need to get to the bottom of why urban development is so difficult to deliver.
Funding of course still remains a major factor in the viability puzzle, with developers relying on the likes of GMCA to support schemes to overcome viability gaps. Catherine Edwards of GMCA, discussed the value of patient capital for deliverable schemes and the focus on key strategic locations which can be brought-forward quickly. According to Edwards, there is recognition that we need to be able to deliver everywhere, including the outer boroughs of Greater Manchester, if we are to be able to grow the region.”
The role of the public sector remains key to ensuring viability in secondary locations, though the £45bn of government support made available represents the largest boost in decades. The task for the industry is maximising grans via strategic design.
Land values are also presenting a sticking point for developers, with pipelines stalling. Both Mirley and Gradwell highlighted the shift in land values in Manchester, and the reluctance of landowners to adjust their expectations against costs.
However, despite the challenges, according to Mirley there is cause for optimism. He said: “There is a valid point about where interest rates and investment yields have gone, which has cemented the issues we have got today. There are signs that this is starting to loosen and yields are hopefully now moving in the right direction, which will help make Manchester viable without grants, then moving some of the more suburban locations around Greater Manchester closer to viability. The other thing that patient equity does is allow a shift between forward-funding yields to a stabilised asset yield which is about 50 basis points, which makes a big difference in terms of the asset. It will happen in more suburban locations, but it will take a bit longer.”
Patel and the RBC team were keen to emphasise the importance of focusing on delivery and working around the various limitations to keep development moving. Various strategies can, combined, help to ensure viability. The complexity of development isn’t going away, but developers, architects and consultants must consider all options during the design process, covering apartment size optimisation, floor plate efficiency, façade complexity and Core and MEP efficiency.
Embracing technology also offers untapped potential for the industry to reduce friction throughout the construction process, which means looking seriously at new and more innovative capabilities, including pre-fabrication and modular solutions.
Asked whether there is more that could be done to smooth the friction from the process, there was agreement that early-stage engagement with consultants would help in de-risking the build element and improve efficiency.
There are also questions around the quality of the brief provided by developers, which, when approached without clarity, can further frustrate construction timelines.
Despite the challenges, the general consensus is that things are looking more positive for the industry, particularly in key cities like Manchester. Mirley highlighted the real positivity in sales and rental markets in Manchester, with strong demand from UK owner occupiers, particularly at the top end of the market.
While viability will remain a challenge for developers and consultants alike, a collaborative approach underpinned by early engagement is key to bringing new schemes forward and delivering the high-rise residential schemes the country needs.