Some words from Einstein…

“It takes a touch of genius and a lot of courage to move in the opposite direction”.

To reduce tax in a way that will encourage growth takes the touch of genius but also takes courage when public finances are scarce. Let us look at house building. The Prime Minister has acknowledged that housebuilding is a wonderful accelerator of the economy. So why not reduce tax to stimulate supply?

We can agree that housing development should ideally be undertaken in built up areas where there is greater demand, more facilities, more availability of services and better public transport. Density of development can be greater too. In built up areas many potential sites are small. Often with obsolete and derelict residential buildings. Policies designed to promote development of these sites would increase the development of new homes in built up areas.

The issue is that sites for housing in built up areas often involve demolition of an existing building in order to develop at a higher density. Such sites carry a high Existing Use Value (EUV), and while they may be ideal for development of housing, the developer’s ‘bid’ for the site has to entice a sale. The imposition of the SDLT surcharge and Community Infrastructure Levy make it difficult for the Development ‘bid’ to exceed EUV.

Yet we now see that the Government has raised rates of SDLT on the purchase of residential sites by development companies. The revised measure raises the SDLT surcharge from 3% to 5% above the standard residential SDLT rates.

The following table outlines the current and proposed SDLT rates:

If developers are going to have to pay SDLT at this level we will not see the housebuilding on small sites in built up areas.

The better policy might have been to eliminate SDLT surcharge on the acquisition of small sites. This would be a supply side stimulant allowing developers a better chance to increase their ‘bids’ for small residential sites above EUV in built up areas.

Let us hope that the Government will reveal its genius and show the courage to give us the opportunity to build more new homes in our built up areas.

Denis Minns is a Chartered Surveyor and author of Projects in Property: The Business of Residential Property Development

Prologue to the Reeves Tale

There is a wholesome logic in the suggestion that a housing development should first be undertaken in built up areas. In built up areas there is greater demand, more facilities, more availability of services and better public transport. Density of development can be greater too.

The issue is that sites for housing in built up areas are very often small, involving demolition of an existing building in order to develop at a higher density. Such sites carry a high Existing Use Value (EUV) and while they may be ideal for development of housing, the value of such sites does not exceed EUV. This means simply that the developer’s ‘bid’ for the site is too low to entice a sale. This issue has been made worse by the imposition of the SDLT surcharge and Community Infrastructure Levy making it impossible for the development ‘bid to exceed EUV.

SME developers are those who take on small sites in urban areas. They are the ‘carrion’ of the industry who feed on obsolete and derelict buildings. They are adept at sourcing potential sites in their local areas. They often build to a higher quality than national housebuilders and small sites are so much quicker to complete. Their developments are designed to ‘fit in’ with existing architecture.

While SME housebuilders might build between one and twenty houses on any site, there are potentially many SME housebuilders. Policies designed to promote these SMEs would make a significant impact on the development of new homes in built up areas.

It is no good eliminating SDLT for first time buyers. This would have the effect of increasing the price of housing to first time buyers. The better policy would be to eliminate the SDLT surcharge to SME developers. This would be a supply side stimulant allowing SME developers a better chance to increase their ‘bids’ for sites above EUV and to acquire sites in built up areas. In addition erasing Community Infrastructure Levy for small redevelopment sites would allow SME developers to increase their ‘bids’.

Housebuilding is a wonderful accelerator of the economy. If these changes are made, any shortfall in tax would soon be made up by increased economic activity.

The professional team for a Project in Property

A Residential Development Project will require input from a team of professionals each playing an important part in its planning and implementation. The Developer should be sure to appoint the professional team with clear instructions so that no part of the project is omitted and neither is there any misunderstanding as to who is responsible for each task. It is therefore useful to prepare a team list of the professionals as soon as these appointments have been made.

Team

The team list should give contact details of the professionals engaged for the project. These may include Architect, Civil and Structural Engineers, Landscape Architect, Quantity Surveyor, Project Manager, Principle Designer, New Home Warrantor, Land Surveyor, Hydrologist, Arboriculturist, Ecologist, SAP Architect, Building Control Surveyor, Soils and Environmental Surveyors, M & E Engineers and Lawyer.

This is not a list of subcontractors. The appointment of subcontractors will come later in the project if you are undertaking the main contract yourself in the procurement process. Once terms are agreed with professional consultants and appointments made the team list can be circulated to all of them to allow professionals to contact each other for plans and specifications and consultation. Members of the team will communicate with each other, check and question information and notify alterations and updates to the Project Manager.

This communication will assist the Principal Designer in his role of ensuring all design elements are communicated and understood and taken into accuracy by all team members to avoid omissions and misunderstandings. The Principal Designer will ensure that the consultants’ professional indemnity insurances are collated and retained on file for insurance purposes. Let us then consider the team list and see who does what.

Architect

The Architect will design the scheme and prepare site plans, floor plans, elevations and sections to obtain planning permission for the houses to be built. Upon grant of planning permission he will prepare working drawings and specifications for engineers and subcontractors. He will show the estate road where required for later detail by the civil engineer. He may also prepare transfer plans for sales and registration at the land registry and plans for services within the dwellings showing positions of power points and radiators.

Landscape Architect

The Landscape Architect may mark up a landscape plan showing hard and soft landscaping detailing plants and providing a guide for their maintenance. On simple schemes the Architect may incorporate this on his site plan and this is often enough to satisfy the landscape condition.

Structural Engineer

The plans prepared by the architect will be submitted to the structural engineer so that he can calculate loadings and identify requirements for steels and padstones and prepare sub-structure drawings.

Civil Engineer

The civil engineer will be responsible for foul and surface water drainage, estate roads and hard landscaping. They should notify the drainage authority of connection to the public sever and obtain consent for this. This is the S106 Agreement under the Water Industries Act 1990. They will analyse ground levels to see what retaining walls might need to be constructed and if of a certain height will draw up structural drawings for these.

Mechanical and Electrical Engineer

M & E Engineers are not always vital to the team. This is not to say that they don’t make a valuable contribution but for a smaller project the idea of involving one additional member of the team to draw up service drawings may not seem necessary. They will prepare the mechanical and electrical drawings and arrange the services to the site. They may also be responsible for preparing Energy Performance information at the end of the project.

Building Inspector

Building Inspectors used to be employed by local authorities building control departments to ensure that buildings meet the building regulations. Today they are Approved Inspectors (AIs), qualified to undertake building control work in accordance with s49 Building Act 1984 and the building approved inspectors regulations, and they are often privately owned firms of chartered surveyors. It is sometimes useful to allow the new home warrantor to select his preferred building inspector to avoid duplication of inspections. Alternatively some local authorities still retain building control departments often working for several adjoining local authorities.

Quantity Surveyor

Quantity Surveyors prepare cost schedules for construction projects. They are not always required on smaller residential projects where experienced developers can use historical building cost information to produce cost schedules. A breakdown of build costs will be essential to an understanding of the costs to be incurred in the project.

Party Wall Surveyor

Where a project involves construction or excavation within six metres of a party wall, a party wall notice will need to be served. A Party Wall Surveyor will set out the works to be undertaken and serve notice on the adjoining owner. The adjoining owner may then agree to the works or appoint his own Party Wall Surveyor to agree to the works. If there is any dispute between them a third surveyor will be appointed to decide the appropriate course of action.

Land Surveyor

The Land Surveyor will prepare a scale topographical survey of the site prior to construction regarding buildings, levels and features. This is a most useful survey as it may reveal discrepancies with title plans. It will provide the Architect with a scale plan upon which to base his site layout and the engineer with levels for him to make his recommendations. The Land Surveyor may return to site just prior to foundation construction to set out the works.

Environmental Surveyor

A soils survey may need to be undertaken to ascertain ground conditions for foundation design and to establish whether there is contamination of soil. The environmental survey employs a rig to drill down into the substructure to collect samples for testing. Where site has been used for industrial purposes it will be important to have soil samples analysed and it should be appreciated that where there has been contamination soil will need to be removed. This may be a significant cost.

New Home Warrantor

A New Home Warranty is issued by an insurance company and is a warranty against financial loss incurred from structural failure of a new home. Most such warranties offer a remedial period of two years from legal completion of a house where minor faults are remedied at no cost to the buyer and a period of ten years structural guarantee. The NHBC was at one time the only body to issue such warranties but today there are a number of insurers in the market many of whom are retail businesses re-insuring in the insurance markets. The New Home Warrantor is responsible for ensuring that the housebuilder has a new homes code in place such that the buyer is clear about such matters as service routes, suppliers, operational procedures for fittings and contact numbers for maintenance.

Ecologist

An ecologist survey and report is often a requirement of a planning application. Such a report will make recommendations which are often recited or referred to in a planning condition attached to a planning permission. Many species of wildlife are protected under the Wildlife and Countryside Act 1981 S 1-27 which is regulated by Natural England from whom licences have to be obtained when developments may effect wildlife habitats. In view of the sensitivity of timing of studies on site, an ecology survey can take a considerable time to prepare. The first requirement is the Provisional Ecology Assessment in which the wildlife to be studied is identified. Clearly this should be sought early in the project planning as in some cases the viability of the project may be called into question by the result. The Ecologist is the expert to prepare proposals for Biodiversity Net Gain where this is a requirement.

SAPs Assessor

A Standard Assessment Procedure is undertaken pursuant to Part L Building Regulations which is concerned with energy efficiency. A new home has to comply with SAP ratings which are required to produce an Energy Performance Certificate. It is usual to submit drawings to a SAP Specialist at design stage so that he can advise whether modifications will need to be made prior to construction. The SAP Specialist will measure the area of the proposed building, examine the specification of materials and the energy consumption of the heating system lighting, ventilation and renewable technologies. This information will be uploaded to software to product a target emission rate (TER). Upon completion of the building a further examination of the new home will take place including an air test and the information submitted to the building inspector for him to issue the final certificate.

Hydrologist

With flooding an increasing concern it can be important to ensure is that surface water from the site drains well, and that buildings are constructed with sufficient raised floor levels such that any flooding does not affect occupants.

Acoustics Consultant

Acoustics Consultants will specify materials and design of exterior walls, floors and roofs to mitigate noise and vibration from external sources such as flight paths, motorways and underground railway tunnels. Sound transmission whether airborne or impact sound is covered by Part E of the building regulations and therefore dealt with by the architect in his design and specification.

Health & Safety Consultant

Building sites have to comply with Construction Design and Management Regulations and there are a number of documents that will be kept on site to evidence the adherence to health and safety. The Health & Safety Consultant will make frequent visits to site to ensure that procedures for health and safety are being followed and that all required documentation is maintained on site. The appointment of Health & Safety Consultant is for the developer to decide. Failure to comply with a health and safety regime may result in a visit from the Health & Safety Inspector and closure of the site as well as risking the safety of operatives on site.

Arboriculturist

Many local planning authorities will insist on a tree survey as part of the planning application. Preserving trees is important for the environment and often an expert will need to provide a report as to root protection and while felling of trees is straight forward, measures for crown lifting, pruning and root protection can be quite complex and will require the expertise of a professional Arboriculturist.

Principal Designer

The Principal Designer is a role created by the CDM Regulations 2015. By ‘designer’ it does not mean that they ‘design’ anything. It means that they are responsible for seeing to communication between design parties and safety of design and the recording of this information. Often this role is undertaken by the architect but it can be a specialist or another professional. There are many people involved in the construction team. Communication affects so many aspects: design, deliveries, specification, site rules and procedures. When something goes wrong someone will say “I didn’t know”. Communication is essential to avoid mistakes and to avoid injury.

Letters of Engagement

The Letter of Engagement is the instruction to the consultant setting out the scope of the work required of him and confirming the fee structure agreed. This letter should be retained and should the consultant be required to give a collateral warranty it will be specified in the agreement together with a requirement for a copy of professional indemnity insurance. The developer should not be tempted to save money by engaging unqualified ‘professionals’. Not only can this lead issues and omissions but it may not actually save money. Banks, insurance companies, surveyors and lawyers will wish to see that the professional who has been appointed is properly qualified for the job to reduce the risk of something going wrong. They will also wish to see that professionals are well covered for any design errors by suitable and adequate Professional Indemnity Insurance should something actually go wrong.

Professional Indemnity Insurance

All professionals are required to have PI and a developer is running a huge risk if he engages professionals without it. In fact they may find it difficult or expensive to obtain new homes warranty insurance or finance. The requirement is for those with a design input to be insured. This clearly includes Architect and Engineers but also piling contracts, timber frame contractors and suppliers of precast floor beams. The developer should ask for a copy of their insurance and keep it on his drop box file. I heard of a New Homes Warrantor charging a huge indemnity premium precisely because the technical team the developer had assembled were unqualified. The warrantor had priced the risk.

Collateral Warranty

When seeking a quotation from a Professional Consultant the Developer should state the requirement for the Consultant to sign a Collateral Warranty as part of the terms of appointment in favour of the funder which should be set out in writing and signed by the Consultant. This may save prevarications later when seeking to return the signed Collateral Warranties to the funding bank.

This blog is taken from the book ‘Projects in Property’ by Denis Minns, published by Bath Publishing.

The Dam. A Cautionary Tale.

This is a story taken from Robert Caro’s brilliant biography of Lyndon Johnson, the Texan politician who became the 36th president of the United States. It is a cautionary tale to property developers and land owners who might rush into a project without the proper due diligence.

The tale involves the civil engineers Brown and Root and the Marshall Ford Dam that crosses the lower Colorado river in Texas. In 1936 the Bureau of Reclamation announced that it was taking bids for a $10m Dam at the Marshall Ford. Brown and Root was, at that time, a small engineering contractor that had undertaken small project throughout Texas. This was something different. This was the big one. Through the assistance of their lawyer, who just happened to act for the Lower Colorado River Authority, Brown and Root secured the contract to build the Dam.

The First Problem

This arose as the Bureau had not been authorised to build the Dam. Each project to be built under the River and Harbours Relief appropriation act had to be specifically authorised by Congress. The Control General’s office had noticed the lack of authorisation and had refused to advance the initial $5m expenditure on the Dam. A Texas congressman who supported the project stated that it would be authorised next year and Brown and Root went ahead on this basis. The start on site was to cost Brown and Root $1.5m for specialist temporary works. This money was to be borrowed to be repaid out of the second tranche of $5m. The Marshall Ford Dam was therefore a huge risk for Brown and Root. If the authorisation did not come through in 1937 the company would be wiped out.

Brown and Root, however, needed the job. There was no other work in Texas. Everything was broke. Brown and Root went ahead, invested the $1.5m and engaged some 2000 workers on the Dam.

The Second Problem

The river bed was not owned by the Federal Government. Under federal law the Bureau of Reclamation had to own the land on which dams were built. In sixteen of the seventeen western states in which the bureau was authorised to build dams, this requirement would not have been an issue. When the former territories had been admitted to the Union, ownership of all public owned land was transferred to the Federal Government. Texas, however, was not a territory when admitted to the Union. It was an independent republic. It still owned public lands including river beds. Indeed the Texas legislature had forbidden the sale of all public land to anyone including the Federal Government.

This distinction had been overlooked by the bureau until a junior attorney had checked the title to discover that it was proposing to build a $10m dam on someone else’s land. This introduced a significant problem for Brown and Root. They were building on land not owned by their client and unable to draw the additional $5m to complete the project.

The Third Problem

An additional problem was that the Dam violated ‘work relief provisions’. The cost was paid out for materials and skilled labour. The work relief administrator was concerned to see that funds advanced by the Bureau were to be specifically for work relief. In the meantime Brown and Root carried a debt of $500,000.

The questions surrounding the Marshall Ford Dam were posed to President Roosevelt to decide. Lyndon Johnson played a vital role in the outcome and eventually authorisation was given.

The lesson here seems to be not to assume that title is in the name of your client landowner. Carry out due diligence and check all matters.

The Path to Power: The years of Lyndon Johnson by Robert Caro

$1 in 1936 is worth $22.63 today.

Increasing the supply of reasonably priced housing in the UK

Denis Minns’ written evidence to the Economics of the UK housing market inquiry in 2015 which some Government Policy now recites.

1 | Seek to eliminate ‘development costs’

There was a time when we spoke of ‘building costs’ of new homes. The costs of bricks and mortar, timber and tiles and the fitting out and finishes. Today there are so many additional ‘development’ costs driven by compliance. Additional drawings, surveys and reports for planning applications. Method statements for tree works health and safety. Building standards compliance and new home warranties. Service information, Indemnity insurances and bonds. The cost of a new home is increased by these development costs and crucially the time taken to tick all these boxes which is often spent by highly paid professional consultants. Many planning conditions requiring further planning applications and written permission prior to commencement of works are unnecessary.

Many development costs and planning conditions could be erased.

2 | Allocate sites specifically for certain housing categories

The RICS suggested this some years ago. Planning permissions should specify the category of residential development granted whether it be for Private rent, social housing, homes for the elderly, first time buyer housing or indeed a mix. This would depend on a planning authority’s housing needs. The value of the site would thereby be ascribed by the category of residential development permitted. This would enable sites for social rent for example to available at lower cost as the planning permission would limit the value of the site.

This would be a relatively simply change to subordinate legislation.

3 | Take positive action to identify ‘grey belt’ land for development

By ‘grey belt’ I mean that colourless wasteland that surrounds our urban areas without the energy of the urban build environment or the tranquility of the rural idyll. There will be small pockets of land here that are virtually serviced. Little additional infrastructure will be required.

Some local authorities are calling in proposals for sites. This is a welcome pro active approach and should see some better use of grey belt land.

4 | Offsite production and design common denominators

Eric Lyons, the architect who designed the new village of Ash Green in Kent spoke of ‘common denominators’ in housing. Those repeated designs and components that reduce cost. Offsite production of houses to repetitive designs would reduce costs of design and construction.

Repetition should be embraced. Use of common denominators and offsite production of houses should be encouraged.

5 | Increased densities

Britain seems obsessed with two storey housing. In France some of the more beautiful urban areas are four or five storey. Kensington and Chelsea is the most expensive residential borough in London. Yet it is one of the most densely built in the country.

We should introduce a planning presumption that any single storey house may be demolished to be replaced up to three storey house unless there are compelling reasons not to allow it.

6 | Government schemes

Shared Ownership is an excellent scheme operated by most housing associations and should be encouraged. Stair casing should be made as easy as possible. Subsidy of Shared Ownership tenants in stair casing is the proper way to encourage Right to Buy. Housing associations should be given more freedom to transfer tenants from their rented models to Shared Ownership models with the prospect of eventual ownership. Shared Ownership tenants should be given the freedom to sub-let rooms.

Right to Buy housing association houses is a flawed concept which is highly controversial seeming to favour a small group of people. It is unloved by professionals as it weakens the ability of Housing Associations to carry out their functions and potentially reduces housing association stock.

Allow housing associations to control their own disposal of housing through their shared ownership model.

7 | Taxation

Stamp Duty Land Tax is in practice a tax on the sale price of a house. If SFLT is raised, the vendor will receive less for his house, when reduced he will receive more. However the buyer pays this tax and her perceives it as a burden when on completion he pays over SDLT to the revenue. It is thereby a disincentive to demand. Knight Frank have recently reported substantial decreases in transaction volumes in the high end housing markets in London. The raising of SDLT levels on high end housing and its reduction on low cost houses has merely distorted the relative prices of houses.

SDLT is an efficient tax to collect in a nation where land is subject to compulsory registration. It is therefore essential to retain it but essential to get it right. I doubt whether the receipts of SDLT since the charges were implemented have increased the tax receipts.

Incentives need to be introduced to increase transaction levels. Further reform might be directed as socio-economic goals. For example certain houses could qualify as SDLT free. Houses sold for demolition and redevelopment for example.

Community infrastructure levy is calculated at a set rate per square metre of additional accommodation permitted. It is a blunt instrument of local taxation based on infrastructure requirement and does little to encourage the provision of house building particularly of smaller sites where development values are only marginally in excess of existing use values.

Community infrastructure levy should apply only to larger sites.

8 | Privately rented accommodation

We are starting to see more large professional landlords coming in to the Private Rented sector. We will thereby witness more professionalism and consistency in management, more build to let schemes, longer term tenancies and security of tenure. The reduction in tax relief to small landlords is not therefore disincentive to supply of new homes to the private sector.

Encouragement of stable rented accommodation comes from larger landlords with long term strategies, and build to let schemes designed for rentals.

9 | Social Housing

Social housing is housing let at low rents to those who simply cannot afford to pay market rents for their housing. Right to buy has no place in this category. The objective has to be to reduce rents as much as possible so that tenants can afford them without resorting to Housing Benefit. This might be achieved by; *Building far more social housing schemes recognising 1 and 2 above. Designing and building cheaply. Allocated social housing sites. *Imposing strict occupancy conditions on tenants. No car where parking is limited, no smoking in blocks of flats, alcohol ban for certain tenants.

The requirement for percentages of affordable housing as a condition of a planning permission is established. Local planning authorities should adopt a flexible approach to making housing affordable. For example discounted housing. The sale of new homes to first time buyers at discount to market price. This might be an affordable requirement that would benefit the developer and the local authority.

Local planning authorities have long been requested to recognise viability when dictating affordable requirements. They should be willing to be flexible.