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The key issues affecting affordable housing development in 2021

Posted on 12 November 2021

From Brexit to COVID-19 to material shortages, it’s been a disruptive year so far for housing associations and the construction industry more widely.

Richard Ingram, Interim Head of Development for CHS Group shares an overview of the current challenges Registered Providers of affordable housing are currently tackling, with input from Cross Keys Homes Director of New Business Development, Gary Norman.

Construction costs, material shortages and supply chain delays

Like many industries, the construction industry has felt the pinch of the past 18 months and is experiencing significant cost increases that put pressure on the viability of housing schemes and the competitiveness of Registered Providers.

Between the first quarter of 2020 and the first quarter of 2021, housebuilders’ costs increased by 3.6%. Most of the cost increases focused on materials and labour shortages, with insulation, aggregates, timber and steel being the key cost pressures mentioned by housebuilders, as well as higher costs of transport, energy and labour. By September 2021 Government figures show costs increasing by over 20% a year.

How the market rates in the construction industry will continue developing throughout the rest of the year and into 2022 is difficult to define. But, rising material and labour costs, shortages of construction materials and labour (including skills shortages) and planning system and compliance availability, have been perceived to be the biggest challenges we’ve faced this year so far.

During the early stages of the pandemic, it was also suggested that some large housebuilders were stockpiling materials. This put more pressure on local suppliers to service smaller construction companies, who were helping to deliver affordable housing for Registered Providers. In turn, this led to increased prices due to supply and demand, which at that stage had to be absorbed by the contractors, due to fixed price contracts.

Commenting on the scale of shortages in the construction industry, fellow HCP member, Cross Keys Homes’ Director of New Business Development, Gary Norman, explained: “The supply of materials in our industry is experiencing the same disruption as across most other industries. Logistics channels around the globe are overwhelmed, causing delays to key materials essential to homebuilding. Developers across Europe are also experiencing a spike in demand so there are a lot of businesses vying for the same materials and we all want them now.

“A labour shortage is another key factor, as many skilled workers returned to their home nations when COVID-19 struck. With a construction boom happening in Europe too, large numbers of workers have not returned, deciding instead to take advantage of ample employment opportunities within the EU.”

When materials become scarce, this also had a knock-on effect with productivity and, inevitably and frustratingly, delays can be the result. Registered Providers rely heavily on accurate practical completion dates, so that they can plan and better understand when revenue will be coming into the business. Delays create uncertainty and can, in some cases, create problems for short to medium-term business planning as revenue streams are affected.

More recently, it has become evident that due to the uncertainty around material prices, a small number of contractors are refusing to enter fixed price contracts or are pulling out of deals, as they can no longer sustain the profit margins they require. This creates a real problem for Registered Providers, as most new build contracts are Design and Build, which offer a fixed price. Entering a contract which does not have a fixed price creates a great deal of uncertainty and risk management issues; the result being those schemes either stall or the deal falls through. This, again, creates issues for business planning and the supply of much needed affordable housing.

Brexit

At the beginning of the year, finally, Brexit was completed. However, it is worth noting the great deal of uncertainty the construction industry faced prior to the completion. No one was fully aware of how Brexit would affect prices, labour and the industry more generally and, amongst other challenges, this created huge difficulties when setting up new building contracts.

From a client’s point of view, they wanted to be protected from uncertainty and therefore their respective legal teams would try to push all risk onto the contractor. In turn, as the contractors were unsure how Brexit was going to affect them and their ability to adhere to the building contract, their legal representatives would try to caveat the Brexit clause, so that any risk sat with the client. As the Brexit process moved forward, some parties adopted a risk sharing policy, but progress was slow and this inevitably created delays and frustration, especially if it was an extremely high value scheme.

Now Brexit has happened, and we have almost a year’s practice of navigating challenges, I’m pleased we can now at least push forward with more certainty and clarity, for the benefit of those who need affordable homes.

First Homes and the New Shared Ownership model

In the last 12 months, the government has introduced two new initiatives affecting the deliverability of affordable homes. Firstly, the new shared ownership model has introduced lower first tranche sales; meaning the initial stake bought by leaseholders in a shared ownership home can now be as low as 10%, when previously this figure was 25%. While, in theory, more beneficial for the consumer, this creates an issue for Registered Providers who, now with reduced income from first tranche sales, are having to look closely at their business modelling; ultimately impacting their ability to deliver affordable homes.

While the industry was still adapting to this change, the government also introduced First Homes, which will ensure a percentage of all affordable homes will be delivered through this model and will offer prospective purchasers discounted prices on their homes. Typically, a First Home at 80% of market value will be much more expensive than a shared ownership home at 50% or less of market value. As it stands, it is thought that private developers will keep hold of these units and market them themselves, starving Registered Providers of an important method of delivering affordable homes through shared ownership and removing the cross-subsidy often needed for the affordable rented homes on the same sites. It is very early days with First Homes but there is a lot of uncertainty around ensuring a continued flow of provision of affordable homes to buy.

COVID-19

Of course, COVID-19 has been the huge disruptor of all industries over the past 18 months. Over the latter few months of 2020 and early 2021, construction sites began to re-open again but with limits on social distancing and meetings on site in line with government guidelines. This undoubtedly had an impact on progress and deliverability of affordable homes, but I am proud that Registered Providers have continued to work with their contractors, Homes England and other funding bodies to overcome these issues and now, finally, I hope we are out of the other side for good.

Commenting on how the challenges have impacted its business, Gary Norman from Cross Keys Homes, added: “CKH has continued to deliver new homes over the last 18 months, albeit at a reduced rate compared to our original plans. Housing associations and private developers alike are experiencing the ongoing impact of the pandemic on their development programmes. The sector continues to face significant challenges for several reasons, but perhaps most pervasive is the domino effect of pushing ahead with plans which were put on hold. The world is bouncing back into action which means that everything is happening at once. Increased demand is taking a toll on local planning departments who cannot keep up with the influx of submissions they are receiving. So, in turn, viable schemes are taking longer to get to site.

“The good news is these are relatively short-term challenges. Given time, supply issues will start to ease, and planning departments will catch up. While there’s more competition for land, there’s also a clear appetite from landowners to sell which creates more opportunities. Although we’re still witnessing the immediate impact on our development delivery, CKH remains as ambitious as ever and is forecasting that next year will be one of our strongest yet.”