From Dow Jones Newswires
March 18, 2004

LONDON -- The government's spotty record on improving public services and infrastructure will no doubt feed skepticism about the ruling Labor Party's ability to tackle the U.K.'s critical housing shortage.

But the 2004-05 budget report could be a watershed, as the public gets to see the policy recommendations of an in-depth review of housing by Bank of England Monetary Policy Committee member Kate Barker and possibly a menu of government policy proposals. Industry officials and analysts are hoping what follows will include streamlined planning, tax incentives and direct government funding to boost the housing supply.

The implications could be huge for industries ranging from building-materials suppliers and infrastructure engineers to commercial and residential developers.

"If half of what they say is spent," said Leslie Kent of JM Finn stockbrokers, "housebuilders, land developers, even building-materials suppliers are going to do well."

But the effects could also be felt elsewhere in the economy, creating demand for services and expertise in transport infrastructure, building design, environment cleanup, water, waste, health care and education.

All told, Mr. Kent said, government success in cutting red tape, easing planning restrictions and providing the right financial support could give a boost to industries that make up between 8% and 9% of U.K. gross domestic product.

"That's a big part of the economy that's being incentivized," he said.

The U.K.'s urban housing problems are no different from those of other industrialized countries with increasingly wealthy and urbanized populations. In the U.K., however, the number of new dwellings being built has actually been falling in the face of rising demand.

According to Ms. Barker's interim report in December, only 175,000 dwellings were built in the U.K. in 2001, marking the lowest output level since World War II.

The review largely blamed the local planning system for making it difficult and time-consuming to get building projects off the ground. Planning restrictions, among other factors, have helped to make house-price inflation -- which is at 2.4% a year in real terms -- far exceed the 1.1% 30-year European average, making cities such as London unaffordable for first-time buyers and moderate-income service workers such as policemen, firefighters and nurses.

The report estimated that the U.K. needs 39,000 new houses a year just to cope with population growth and changing household-formation patterns.

Emphasis on Mixed-Use Projects

Much of the current focus is on what role the government will take in terms of planning, funding and adjusting tax policy to encourage the regeneration of urban industrial or "brownfield" land for high-density, mixed-use developments.

Current guidelines already favor such developments because of the belief that they'll help preserve the U.K.'s countryside. But English Partnerships, the government body responsible for assembling land and boosting the viability of marginal sites, in December reported that only 11% of the 65,500 hectares of brownfield land on the National Land Use Database is available and viable for immediate development.

Worse, according to Wilson Bowden PLC, a major residential and commercial developer, regulatory or economic constraints are preventing that land from being developed, leaving only enough for two to three years of construction at current rates.

To address the housing shortage, the office of Deputy Prime Minister John Prescott has outlined plans to spend GBP22 billion over three years to develop a "Sustainable Communities Agenda," including GBP5 billion for development of affordable urban homes as well as money to improve existing low-income housing, parks and public spaces.

On the policy side, the House of Lords is considering a bill that would make it easier to force the sale of land to enable large projects.

The bill also aims to speed construction of new dwellings on brownfield land by letting developers bypass lengthy negotiations with local planning authorities, allowing them instead to pay up front by building community facilities such as schools.

Oliver Foster, policy officer at the Royal Institution of Chartered Surveyors, said that depending on what the Barker Report recommends, the government should also look into changing its taxation policy, which currently requires a 17.5% value-added tax rate on refurbishing buildings but demands no VAT on new dwellings. Such a change would both encourage regeneration of existing housing and channel funds toward brownfield development.

Another key to supporting urban redevelopment is the government's plan to create real estate investment trusts, or REITs, beginning next year. These professionally managed vehicles, which often list on equity markets, have had great success in the U.S. and elsewhere in drawing investments into property development.

REITs Would Boost House Construction

Ian Fletcher, director of residential policy at the British Property Federation, said that if REITs can be introduced in conjunction with improvements in the planning system, they "would create an immediate stimulus to bring forward land" for residential development, with homebuilders being among the beneficiaries.

He noted that one-sixth of institutional investment through REITs in the U.S. goes into housing, while 99% of U.K. institutional money goes into commercial property.

Even if the government does sweep away the red tape, other challenges await those seeking to fulfill the goal of building high-density, mixed-use developments containing "social" housing, as well as private homes and business establishments.

Pierre Williams, head of media relations for the House Builders Federation, said "there is little doubt there will be major management and operational difficulties to overcome" in trying to create such integrated communities.

At the least, he said, success will require "much greater cooperation" among local planning authorities, private home builders and developers of social housing and commercial property.

Such cooperation on mixed-use projects, with encouragement from the government, may take the form of ever-closer development partnerships, Mr. Williams said.

But it's also likely to spark further consolidation among house builders and put in play those with specialized skills in urban residential developments. Westbury PLC, Country & Metropolitan PLC and McCarthy & Stone PLC are frequently mentioned in this regard.

The acquisitions spotlight will also fall on companies with attractive land banks, such as Bellway PLC or Crest Nicholson PLC.

Crest Nicholson is already the subject of takeover speculation after property developer Heron International Ltd. announced in late January that it had built up a 12.48% stake in the company, which owns or controls an unusually large and attractive store of development land.

"Some of the middle-sized companies could be vulnerable," Mr. Kent said, especially if large property developers start to view residential development as a way to sustain or supplement their commercial developments near city centers across the U.K.

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