Urban & Civic’s founder sits down with CN to talk millennials, industry business models and the truth about the housing crisis.
Almost an hour into a lunch with Nigel Hugill, he has suddenly noticed that I am eating pasta for my main course.
“Did you mean to order that?” the founder of Urban & Civic asks in a concerned tone, as if he’s quite sure there’s been some mistake (I have only just finished a pasta dish for my starter).
It’s the first time he’s paused for breath since bounding up to meet me at his “usual” table at Mayfair restaurant Murano, armed only with a Blackberry and a tome of the developer’s latest annual report.
I explain away my choice, opting not to suggest that I had been forced into a quick decision when he had ordered off-menu when the waiter arrived.
His quizzical tone is an aside to more than two hours of discussion with a man who has helped shape London. His sights are now set on building the “next generation of [Berkeley chairman] Tony Pidgleys and [Redrow chairman] Steve Morgans” to fix the housing crisis – more specifically, as he suggests later, the rental crisis.
From the moment he sits down at the table, unless he’s eating something (breadsticks, charcuterie, petits fours) Mr Hugill is talking – he later jokes that “there are few things in life that I enjoy more than the sound of my own voice”.
We cover government policy, long-term rental leases, the private rented sector, attitudes towards owning homes among millennials, whether post-war building rates are at all applicable in the housing crisis debate, the reputation of housebuilders – and much more.
Urban and Civic ongoing developments map May 2018
A former special adviser to Sir Bob Kerslake in his time at the Homes and Communities Agency, he is no stranger to the politics of development.
Mr Hugill co-founded U&C in 2009, following a varied career featuring stints as Lendlease’s EMEA chief executive and as a director at Chelsfield, where he made his name alongside his long-time collaborator Robin Butler.
There, the pair led regeneration projects that changed the face of London such as at White City and the 1.4bn sq ft Stratford City.
With U&C now sitting on more than 30,000 units across major South-east sites, predominantly within 100 miles of London, it is gearing up for a fresh assault on the development market.
Securing planning consent
It helps that achieving planning consents – so often criticised by the housebuilding industry as impeding rather than aiding construction – is something of a hobby for the 60-year-old, long-suffering Sunderland supporter.
“I had not anticipated the extent to which there is now a determination on the part of government to see big sites being successful”
In part, he says, U&C is benefiting from the government’s attitude to large-scale development sites. Given their propensity to develop, he now wants to build more sites – and faster.
The developer has five sites with consent or under way; two more at Waterbeach and Manydown (Basingstoke), which are due to go to planning committee stage in September this year; and a site identified for development at Calvert in Buckinghamshire, which the National Infrastructure Commission says has the potential for a new city.
“I had not anticipated the extent to which there is now a determination on the part of government to see big sites being successful,” he says. “The old record is spotty. Institutions were spending £3m-£4m in fees [without success]. Look at Ebbsfleet: it is finally getting going but it’s been 15 years in the making. That wasn’t good for Landsec – it might be good going forward but it wasn’t good. So we knew that could be a challenge.”
Now though, with the amount of senior management time required on larger-scale sites “front-ended”, he says U&C’s peak capital requirements are correspondingly low and development is “more scalable than I first thought”.
As a result, U&C wants to do twice as many projects as it is currently overseeing, adding to a portfolio that includes building 6,500 homes over 577 ha at Alconbury Weald.
“We came to market nearly four years ago,” Mr Hugill recalls. “We had one-and-a-half big projects; we now have eight. It’s snowballing now a bit, partly due to government policy reinforcing big sites.
“If my toes were put to the fire I’d say we’ll do the same again in the next three years. At that point it will be a very big machine. Each [of our sites] is between 4m and 12m sq ft. What we’ve built today is quite impressive, but not off the scale. The escalation from here is very rapid and in train.
“If we’d had lunch three years ago I would have said we’d do six to eight sites; what I now think is we can get to 14.”
‘We’re not saints’
He is proud of U&C’s approach to receiving planning consents, trumpeting the recent award of outline planning permission for up to 2,800 homes, two new primary schools, health facilities and 63,000 sq m of offices at St Neots, Huntingdonshire, in just 20 weeks.
“People have had to spend so much money on endless reports – we invented consultants when we gave up on manufacturing in this country”
He laughs heartily as he points to research by the renowned late urban planner, Nathaniel Lichfield, which showed that the average time it took from first submission of planning to first occupation for housing was almost seven years.
“People have had to spend so much money on endless reports [to fix planning] – we invented consultants when we gave up on manufacturing in this country,” he suggests. “We set out to halve the time it took to get a planning consent. On some we’ll be quicker. Getting a 4m sq ft consent in 20 weeks shook people.
“We’re not saints; we’re just pragmatic. There is no point in doing public consultation if you don’t listen to people. At Alconbury, an 11m sq ft application, I think we had 15 or 16 objections of which four were to the name […] the chief planning officer at the time said, ‘I normally get more objections to a porch extension on a house’.”
Mr Hugill is speaking to CN shortly before Taylor Wimpey boss Pete Redfern tells the City that the planning system is more amenable to development than at any time over the past 30 years. So as volume housebuilders step up their game, can they help to reach the holy grail of at least 250,000 homes a year?
SMEs need to step up
They can be a part of the solution, Mr Hugill says, but there is more to be gained from more SME builders doubling or tripling in size. “I think we can do twice as many projects than we have at the moment. We will definitely have some Tony Pidgleys and Steve Morgans of the future.”
U&C has a master-developer model (see box), which it uses to contract with housebuilders and contractors ranging from SMEs to bigger players such as Redrow – and it wants to work with more.
Housebuilders already contracted by U&C on sites include Avant, Crest Nicholson, Davidsons, Hopkins Homes, Morris Homes and Redrow.
Mr Hugill points to Hopkins Homes chairman James Hopkins as an example of an SME builder that can help the UK increase building rates, comparing him with the UK’s largest housebuilder Barratt, which completed 17,395 in its last trading year – up just 4 per cent on 2016.
“Everyone says: why are house prices so high? I’m more interested in why rents are so high”
“Jamie has gone from building 400 [units] to 2,000. It’s a whole lot easier to create one, two, five-hundred Jamie Hopkins, than it is to have a hundred or two-hundred Barratts.”
Build-to-rent will play an increasingly significant role in U&C developments, but only where the group has assessed the surrounding landscape and based its decision on evidence, or predicted models.
“In relation to WaterBeach [Barracks, the Cambridgeshire site where U&C will build 6,500 homes], the A10 runs past it,” he says.
“There’s congestion at peak times when the A10 hits the A14 and goes into Cambridge. I could say we’ll put money into that road, but there’s nothing that can be done that will help people to drive faster for three miles from WaterBeach to the science park in Cambridge, compared with safe and separated cycle paths.
“I know that most of the people that live in the new development will be relatively young. A disproportionate number will work on the science park. They won’t get a car parking space anyway, so they’ll go the quickest way, which is cycling – if I can make that route.”
U&C believes it will be 50 per cent quicker for cyclists to commute to the science park from WaterBeach (compared with a Cambridge average of 30 per cent), and so the vision becomes part of the planning process.
It’s clear that build-to-rent will also play an increasing part in U&C’s future mix. “The cost of renting relative to income is at the top end of affordability. It’s as expensive as it’s ever been. If I look at the cost of buying, of course the ratio of price of housing to annual income has gone up appreciably. The annual cost of mortgages compared with the average annual salaries? That’s not even in the middle of affordability.”
Is this down to interest rates being so low? What happens if they go up, I ask. “Ok, they might, but look at 20-year bond rates and there’s not much sign of interest rates going up. In middle England in Huntingdon, Warwick, Corby, the actual cost of buying is less expensive than the cost of renting on a historic basis.
“Everyone says we’ve had this problem since local authorities stopped building houses. It’s a 10-year problem, not a 50-year problem”
“So one of the tough questions is: why is the cost of renting so high? Everyone says: why are house prices so high? I’m more interested in why rents are so high. People say rents are so high because house prices are so high. But that’s a lazy calculation – or at least there’s more to it than just that.”
Volume housebuilders won’t meet the targets being bandied about by politicians and in the press, Mr Hugill says, arguing that to build more affordable housing means simply building more units overall.
But he rejects the desire to return to the “halcyon days” of post-war housebuilding, describing it as a romanticised notion. He points out that, although there were enormous spikes in housebuilding post-war, the net impact was reduced because homes were either replacing those bombed in the war, or replacing those being demolished to make way for new stock.
Given the UK’s rapid population growth in recent decades, the fact that people are living longer and there is less space to build on – what’s the solution?
Getting fewer people to divorce and live separately would be a start, he jokes. While silver bullets don’t exist, he argues that large sites and SME housebuilders are important factors, and that he feels an onus to do his part through U&C.
“We’re building fewer houses than we are conceiving net people, who are living longer. That hasn’t happened since 1850. The good news is it’s a relatively recent problem. Everyone says we’ve had this problem since local authorities stopped building houses. It’s a 10-year problem, not a 50-year problem.
“It’s clear to me you can’t do that without big sites. You can’t do it on infill sites, it’s just not practical. We will be a meaningful part of the mix. It’s not just us; others are doing it, like the garden cities.”
Finally, what are his thoughts on Help to Buy? He believes it’s helping – or forcing – young people to skip buying one and two-bed apartments to go straight to two and three-bed houses.
“This is good for me,” he says, “as long as I get everything else right.”
U&C’s master-developer model
Urban & Civic utilises a ‘master-developer’ model, employing builders to carry out work at no upfront cost in exchange for a split of the proceeds of house sales.
New builders on its framework do not tend to be given the first phase of schemes, but once on board and a trusted partner, can quickly grow their businesses alongside the developer.
“A core element of our licence model is that they pay when they sell the houses,” Mr Hugill explains. “That was done for two reasons: to facilitate that expanded customer base and to reduce capital requirements. We’re absorbing the planning risk and the capital risk, in that they’re not committing to pay us before they start building.”
Do you therefore take a greater return by absorbing risk up front, I ask? “It’s about a third of the final sale value of the house, but that’s a hard question to ask because there isn’t the comparable.
“For the housebuilder on, say, a £300,000 house, we get a third. Of the [remaining] £200k, let’s say the house is 1,100 sq ft and that costs them £130,000. So they earn £65k. They’re doing the infrastructure but we’re absorbing the cost. So they’re making £65k on £300k (21.7 per cent margin). That’s not great, but their return on capital employed (ROCE) is off the scale.
“So it’s a lower margin than they would expect to make but they’re not paying for the house until they’ve sold it. They are retailers, we are wholesalers. For us, we’re incentivised that the 5,000th house is as well built as the first. As a wholesaler, maintaining that quality and having that partnership is a really important process.”