Pictured: Andrew Brentnall, Residential Development Director

Local development is being affected by a 'tidal wave of change' according to a new report from Savills.

The report argues that the UK house building and construction sectors have probably never before faced a time when so many challenges have come at once. The result is that viability assessments now matter more than ever.

Key findings of the report include:

·         New policy could prolong the focus on equity rich markets, but if ambitious housing targets are to be met first time buyer and investor markets need to be considered

·         The development industry faces a tidal wave of change and players must evolve to survive

·         New measures of viability are needed in a new age of equity funding and the sector must create vehicles to attract this equity, particularly institutional

·         Land value and developer margin remain key to viability assumptions - new analysis shows that in low value markets only half of all 10+ acre transactions were paid upfront

Andrew Brentnall, Residential Development Director at Savills Nottingham, comments: "Emerging policy recognises the need to respond to market demand, shifting development to markets with the greatest capacity for delivery. This points towards a continued focus on equity rich owner occupier markets, but if ambitious new housing targets are to be met first time buyer and investor markets cannot be ignored, particularly given the opportunities arising from the growth of private renting."

"We would dare to venture that nothing is the same as it was in the summer of 2007 - except perhaps the people and companies involved which are fewer in number," says Yolande Barnes, head of Savills residential research.  "Not only have changes in the finance world changed the nature and scarcity of development funding but a fundamental shift from purchase to renting has altered the DNA of the UK housing market.

The National Planning Policy Framework confirms the Government's determination to increase the supply of new housing.  Its reference to meeting household projections, taking account of migration and demographic change, suggests that the policy aim is to deliver at least 230,000 additional homes per annum in England, against current levels of around 100,000. 

But if new targets are to be achieved, the development industry must evolve to survive the tidal wave of change. Reforms to the planning system and planning framework have entered the public psyche over the past few weeks but there are many, arguably more fundamental challenges: the withdrawal of grant funding from affordable housing providers, reforms in regeneration and the birth of Local Enterprise Partnerships, the withdrawal of public sector funding from various development organisation, the rise of localism the threat of anti-growth lobbies, the advent of CIL, revision of zero carbon definitions, restricted mortgage finance, a dearth of equity deposits, low levels of residential property investment - the list seems almost endless.

In its report Savills research examines these changes and their implications. "Common themes emerge and viability has become a watchword for all participants in this arena," says Barnes.

"Where viability used to mean that sufficient revenue could be generated to cover borrowing and generate investor dividends, this may not be the case now, in a new age of equity funding. A major challenge for the sector will be to create vehicles capable of attracting this equity, particularly from institutional sources." 

Perhaps the beast most changed in the new environment will be the owner of development land. Foremost among these assumptions on viability are land value and developer margin. In the past, both have often been tested with crude rules of thumb that bear little relationship to market conditions. Clearly, this approach is unsustainable. 

"No longer can a landowner expect an income receipt on a raw commodity upon grant of planning permission," says Barnes. "The value and viability of land may well have to be realised over a longer time period. It is already the case that in lower value markets, for sites of over 10 acres, only half of all transactions were paid upfront over the last three years, compared to around 70 per cent in higher value markets. 

Barnes again: "Assessment of site viability at the planning stage needs to embrace an increased dependence on cashflow. Without doubt, the role of some landowners has changed from supplier to development, and even funding partner. 

"The successful players will be those in development and investment who are nimble enough to adapt to survive."