22025_The Future of UK Housing Supply_v2

THE FUTURE OF UK HOUSING SUPPLY

I N T ROD U C T I ON The way we live is changing. The pandemic has made people think about the way we work, live and play. The accepted ‘norms’ have been challenged, and for some, permanent changes have been made. For many, changes have not been possible. Working patterns, affordability, infrastructure, and our homes, are lacking the flexibility to accommodate change in a post pandemic world.

As a result of record inflation, households are experiencing a cost of living crisis, which is affecting how they live and interact with their cities. As we continue to deliver housing, and adapt our existing homes, it is important to consider how the future of our cities will evolve. The purpose of this paper is to give a high-level overview of how UK cities might evolve and how this will shape our homes in the city of 2040.

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F U T U R E O F C I T I E S To understand what our cities might look like in the future, we used trend spotting, logical inference, and scenario-based methods to arrive at a basket of possible futures, which we then analysed to determine the likelihood that they will occur.

In the analysis, we identified three high-impact certainties, which are baked into all subsequent thinking. These are factors over which we have relative certainty and that will affect the status quo. We also identify two ‘critical uncertainties’ around which we frame our scenario analysis. These are factors that will be important for the city of the future, but over which there is a high degree of directional uncertainty, and hence unpredictability.

Futurology sits at the heart of our method. At its simplest, this has been described as developing an understanding of what is likely to stay the same and what might feasibly change based on our knowledge of technology and social undercurrents.

UNCERTAINTIES

CERTAINTIES

ENVIRONMENT & ENERGY

THE RATE OF URBANISATION (OR DEURBANISATION);

AUTOMATION

THE EXTENT TO WHICH WE ADOPT VIRTUALISATION IN OUR LIVES AND WORK

SOCIAL CHANGE

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F U T U R E O F C I T I E S

By plotting a grid formed from our critical uncertainties, we define four strawman scenarios for the city of 2040, which we outline below.

• Virtual reality, overlaying data & visuals onto the real world, AR • VR/AR was mainly for gaming at first, now it’s in the workplace too • IoT, 10g network have become vital • Explosive mix of social connections & new reality – Metaverse, Social media • Tech has amplified human connections, not reduced them

• Remote society • People leaving cities • Life has continued as it was during Covid • Higher virtualisation, lower urbanisation – a ‘digital medium’ • Hybrid working via Zoom, Metaverse … • Focus on time saving and convenience – effects of the pandemic are here to stay • Physical interactions are now more purposeful Humans chose to group together & benefit • The best cities are dense and diverse magnets • Cities remain pretty similar and unaltered • WFH has been rejected

This is the least likely scenario – reversal of urban development • Low urbanisation, low virtualisation • Lost confidence in cities • Society rejects tech and the economy has slowed down • Nature and sustainability at the forefront • People interact in smaller groups which are more personal • There is a risk to property

H O V E R E A C H P A N E L F I N D O U T M O R E

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WHICH ONE IS IT?

Meanwhile, for young people looking for exciting life-experiences (and maybe also some empty nesters), Hyper-Reality presents an exciting opportunity, one that plays out in many films and has a headline grabbing tone. Our view is that the city of 2040 will contain all four scenarios in different measures. We considered the most unstoppable force to be that of technological change and so the most noticeable and inevitable changes to today’s society were likely to be found in the Matrix and in Hyper-Reality. The question of urbanisation is more open to societal choices and remains the biggest uncertainty. Another certainty is the environment, as we have to address climate change in all future scenarios.

None. At least not individually. The world rarely evolves into extreme outcomes, and we are not one homogenous society that moves in lockstep together. Instead, these scenarios should be seen as a combination of the parameters of the future city, the ingredients from which they are made, and the result of nudges from where we are today. How one mixes the ingredients is a matter of interpretation. In our view, some of these scenarios are likely to play out more readily in certain societal segments. As an example of this, the Hyper Reality scenario is likely to be popular with those who are pro-tech, introverts with long commutes, and young families.

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C E R TA I N T I E S WH I C H W I L L S H A P E T H E F U T U R E O F HOU S I N G BY 2 0 4 0 There are some key elements from the matrix which we have certainty over, and these need to be considered when delivering housing for the city of 2040. Sustainability will be at the forefront, affordability will have to be addressed, and homes need to be able to adapt to technology advances and changing societal needs.

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7 The Future of UK Housing Supply | SUSTAINABILITY 01

S U S TA I NA B I L I T Y The UK’s sustainability agenda will shape the physical environment we live in. In June 2019, the UK became the world’s first major economy to pass laws committing it to achieving net zero by 2050. To realise this ambition, we need to address one of the biggest challenges we face: our homes. The UK’s homes currently account for around 20% of its CO2 emissions (Department for Business, Energy & Industrial Strategy).

RETROFIT EXISTING HOMES

OF HOMES THAT EXIST TODAY WILL BE HERE IN 2050 80%

Retrofitting homes is well underway. As things stand, 54% of homes in England have an energy performance certificate (EPC) rating in band D or below, compared to 86% in 2010. With 80% of homes that exist today set to be here in 2050, we have a long way to go. In fact, another 12 million homes need retrofitting to an EPC C or above (English Housing Survey).

PROPORTION OF EXISTING DWELLINGS BY EPC BAND

50% 45% 40% 35% 30% 25% 20% 15% 10%

5% 0%

D

E

F/G

A/B

C

Source: English Housing Survey

2010

2020

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PROPORTION OF EXISTING DWELLINGS BY EPC BAND

DELIVER GREENER HOMES

We also need to improve the homes we are currently delivering. In 2021, 84% of new homes delivered had an EPC of A or B. Although this was an improvement on 2010 (69%), there is still a long way to go (English Housing Survey). Government schemes such as The Future Homes Standard, – ensures that all new homes built from 2025 produce 75–80% less carbon emissions, will help the UK move in the right direction. OF NEW HOMES DELIVERED HAD AN EPC OF A OR B IN 2021, 84%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

‘09 2021 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ‘20

A B C D & below

Source: English Housing Survey

Carbon negative cities will be the norm by 2040, and lifecycle energy prices and emissions will be significantly reduced through the use of batteries, local grids, and the widespread use of renewables . Homes will be designed with wellbeing in mind. Reliance on steel will soften in favour of demountable modular timber, and modern methods of construction (MMC) might have finally taken off. If we are to achieve this, we need to make sure the appropriate infrastructure is in place. The grid needs to be able to cope with the switch to electricity, and we need to train the workforce to deliver and maintain the alternate energy sources and new building methods.

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AFFORDABILITY 02 10 The Future of UK Housing Supply |

A F FO R DA B I L I T Y No matter which scenario materialises, we need to address the chronic shortage of housing in the UK. However, it will be a balancing act with the UK’s sustainability agenda.

HOMES PER YEAR 300,000

The undersupply of homes in the UK is causing people to live in unsuitable

accommodation, with households unable to access the housing they need. The lack of suitable housing is causing overcrowding, more young people living with their parents, impaired labour mobility (impacting the job market) and increased levels of homelessness. The UK Government set a target of delivering 300,000 homes a year by the mid 2020’s to match demand and keep housing costs affordable. This target has not been met. We are 60,000 homes short per year.

HOMES SHORT PER YEAR 60,000

S O H OW DO WE D E L I V E R MO R E H OM E S FO R OU R C I T Y O F 2 0 4 0 ?

IMPROVE THE PLANNING SYSTEM

Two Prime Ministers and several Housing Ministers later, the government has made little progress. However, Michael Gove is back as the Levelling Up Secretary and there is hope he will move forward with the plans outlined earlier in the year. Consistency is needed within housing policy if we are to deliver more homes for our city of 2040.

The biggest challenge to delivering homes is planning. The UK planning system is slow and fragile and does not grant consent often enough. A quicker and easier to navigate system is needed to speed up the delivery of homes. In May 2022, planning reforms were introduced in the Levelling Up and Regeneration Bill. Reform sought to improve the planning system and further empower local leaders to regenerate their local areas.

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S O H OW DO WE D E L I V E R MO R E H OM E S FO R OU R C I T Y O F 2 0 4 0 ?

INCREASE THE NUMBER OF HOMES WE ARE DELIVERING

In the early 1970s, close to 300,000 homes were being delivered. The big difference between now and then is that c. 40% of homes were being delivered by local authorities, but this now stands at only 1% (DLUHC). Housebuilders now deliver the majority of homes, but they haven’t increased the number of homes being delivered in order to replace the fall in local authorities’ deliveries. This is partly a consequence of the perverse incentives that the supply-demand dynamics of our housing market create for house builders.

As long as there is an undersupply of houses, prices will remain strong (ignoring other economic and geopolitical headwinds), and house builders are reluctant to undermine this. We need to find new ways to encourage private housebuilders to deliver more homes, especially with economic headwinds signalling a slower housing market, which is usually associated with lower levels of construction.

ANNUAL HOUSING DELIVERY

180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0%

1978

‘80 ‘82 ‘84 ‘86 ‘88 ‘90 ‘92 ‘94 ‘96 ‘98 ‘00 ‘02 ‘04 ‘06 ‘08 ‘10 ‘12 ‘14 ‘16 ‘18 ‘20 2022

PRIVATE ENTERPRISE

HOUSING ASSOCIATIONS

LOCAL AUTHORITIES

Source: Department for Levelling Up, Housing and Communities

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A FOCUS ON AFFORDABLE HOMES IS NEEDED

A lack of local authority delivery, Right to Buy and other government policies have led to a dramatic decline in the number of affordable homes. Forty years ago, 32% of households lived in social rented homes; this now stands at 17% (English Housing Survey). Over one million people are on a waiting list for social housing and over 40% of private renters are using housing benefits to top up their income to cover housing costs (L&G, BPF). THIS NOW STANDS AT 17% 32% OF HOUSEHOLDS LIVED IN SOCIAL RENTED HOMES FORTY YEARS AGO

Successive governments have shown little appetite for refreshing the state’s previous key role in the construction of affordable housing. However, there is an opportunity for institutional investors to step in and fill this void. Institutional investment in affordable housing has increased over the past few years and we expect this to grow exponentially. The number of for-profit registered providers has grown from 30 in 2016 to 68 in 2022 (Regulator of Social Housing). Money is attracted to the affordable housing sector as it has provided stable returns over long periods of time and can help clients invest with a social conscience. There will be hurdles to jump—the social housing review, changing definitions of affordability, lengthy for-profit provider application processes, not for profit competition, and so on—but they are challenges that need to be overcome.

PROPORTION OF EXISTING DWELLINGS BY EPC BAND

20 30 40 50 60 70 80

0 10

‘80 ‘82 ‘84 ‘86 ‘88 ‘90 ‘92 ‘94 ‘96 ‘98 ‘00 ‘02 ‘04 ‘06 ‘08 ‘09- ‘10 ‘11- ‘12 ‘13- ‘14 ‘15- ‘16 ‘17- ‘18 2019 2020

PRIVATE ENTERPRISE

HOUSING ASSOCIATIONS

LOCAL AUTHORITIES

Source: English Housing Survey

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SPEED UP DELIVERY

Residential construction is characterised by low productivity, mixed quality, slow output, and slim margins for housebuilders. With automation a high-impact certainty in our future city, we believe MMC represents an opportunity to address many of these issues. Factory production allows for better quality control, more efficient use of labour and materials (a big issue over the last few years), better productivity, faster scheme delivery, and less risk of disruption on site. MMC can also improve sustainability within construction. So far, however, MMC has been slow to take off. One of the big issues is that demand fluctuates, and unstable investment and unpredictable construction cycles have made it difficult to establish a consistent supply chain. There is also a huge cost involved in setting up a factory. We can’t let these challenges stop us - we need to continue to try new methods and innovate. If MMC takes off by 2040, the residential construction industry will be transformed.

REPURPOSING PRESENTS AN EXCITING OPPORTUNITY

Repurposing will play an important role in our city in 2040. We can repurpose redundant buildings back into communities, with a use class that better suits the needs of the local area. Inthe right locations, where building infrastructure, demand, and financial viability

align, repurposing can provide brilliant opportunities to deliver more homes.

We are moving in the right direction with changes to permitted development rights that make conversion easier. However, it is hard to make schemes financially viable. Financial support from the government would help move repurposing forward. Repurposing aligns with the government’s “brownfields first’ approach and sustainability agenda and therefore seems an obvious route to take.

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15 The Future of UK Housing Supply | ADAPTABILITY 03

ADA P TA B I L I T Y

The city of 2040 will contain all four scenarios in different measures, and we need to build homes to cater to everyone’s needs. The growing living sector will allow us to offer different products in different locations at a range of price points. Consumers will have a much greater choice in where they live, and they will be able to make decisions based on their lifestyle rather than affordability and availability. Consumer demands will continue to evolve, and we need to be able to adapt our homes to accommodate a range of future scenarios.

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A GROWING NUMBER OF RENTERS

People are becoming more footloose. Career exploration is more common, more paid sabbaticals are being offered, and flexible working has facilitated a rise in digital nomads. Key life stages are happening later. The average age of first marriage has increased, and a record number of women will enter their 30s without children in 2020. These behavioural changes influence how renters want to live. In the city of 2040, there needs to be greater flexibility in tenure length and a greater range of living products to suit their needs.

The number of private renter households in England has increased from 3.6 million in 2010 to 4.4 million in 2021 (English Housing Survey) and we expect this to increase. Longstanding affordability constraints and behavioural shifts have facilitated continued demand for rental accommodation. The notion that renters move out of the market in their early 30s and buy a home is a diminishing idea thanks to stretched affordability among buyers. There is also a greater diversity of tenants, with more older people and families renting, and these types of tenants are staying longer. However, affordability constraints are not the only reason people rent. Renting allows people flexibility, supporting the behavioural changes we have seen over the last decade.

KEY STATS FOR THE REPORT:

50.1%

THIS IS NOW 36.1 - 2 0 2 0 - THIS IS NOW 38.4 - 2 0 2 0 -

FEMALE AVERAGE AGE OF FIRST MARRIAGE IN THE UK IN 2011 WAS

OF WOMEN IN ENGLAND AND WALES BORN IN 1990 WERE WITHOUT A CHILD WHEN THEY TURNED 30 IN 2020

33.8%

MALE AVERAGE AGE IN 2011 WAS 36.1

17.9%

OF THOSE BORN IN 1941

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A VARIETY OF CHOICE

The city of 2040 will offer households a greater choice, with a diverse range of living products to suit everyone’s needs.

STUDENTS

Purpose-built student accommodation will continue to thrive. The number of students in the UK is set to reach xxxxxx by 2040 so we will see more student homes built, particularly in undersupplied cities such as xxxxxxx.

CO-LIVING

Co-living’s flexible lease lengths and city centre locations will attract the growing number of digital nomads. The schemes will help younger generations fly the nest, offering lower rents than Build to Rent.

BUILD-TO-RENT

We will start to see diversification of Build-to-Rent products.

The mid-market will provide affordable homes within a short commute of cities and towns. These homes will help address the rental crisis. There is a chronic shortage of stock across the UK, and it is creating a lack of affordable products for those on lower incomes. The premium Build to Rent market will appeal to city professionals or families who want to embrace an urban lifestyle. They will have a vast array of amenities and primarily be in prime locations.

SINGLE FAMILY HOUSING

Our ageing ‘generation rent’ will benefit from the growing Single Family Housing sector. Younger generations who align more with The Grid and Social Animals will also be attracted to the Single Family Housing offering. Long lease lengths will be offered in Single Family Housing, and this will be particularly attractive to families with children in local schools.

INTEGRATED RETIREMENT COMMUNITIES

Integrated Retirement Communities (IRC) will help solve the ageing population crisis the UK is set to face. IRC will support retirees’ lifestyles, providing restaurants, cafes, hairdressers, gardens, events, and 24-hour onsite care. Retirement homes will be close to town centres, helping create integrated, safe and social communities. The more IRC we deliver, the more family homes we will free up for younger generations.

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LIFE SPAN

Integrated Retirement Communities

Single Family

Multifamily

Co-living

Student Housing

Dependent

0

10 20 30 40 50 60 70 80 90

AGE IN YEARS

A VARIETY OF CHOICE

The types of amenities delivered in housing will depend on the four strawman scenarios. Greater emphasis on wellbeing and community will remain long-term trends. We expect to see co-working spaces in large new developments become the norm, as households will continue to want the flexibility to work from home. Bedrooms, kitchens and living rooms in amenity free schemes will need to be designed to allow these spaces to play multiple functions and accommodate different work patterns. Investors will continue to work hard to create communities, and this can be delivered through shared spaces, events and wider placemaking. Wellbeing in our homes will remain top of the agenda, and we will move towards a city where everyone has access to a well-managed and decent home. Short-term amenity trends in homes are often linked to technology. For example, a cinema room is already becoming old-fashioned, and investors are now talking about virtual reality gaming rooms. Podcast studios seem ahead of their time, but what will be the next big thing? We won’t know what amenities residents will want in their buildings in 2040, but we can ensure the buildings are designed to accommodate change and allow amenities to adapt with technology.

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CON C LU S I ON

Improvements to the planning system are essential; investment in affordable housing is needed; and alternate ways of delivering homes, such as repurposing and MMC, will help us reach our housing targets. We need to consider all four strawman scenarios in the design and delivery of homes, offering a greater variety of living products to meet everyone’s needs. Homes need to be able to adapt to technological advances and changing societal needs.

The real estate industry has an important role to play in curating the city of 2040. We may not know exactly what our cities will look like, but there are some certainties we can address. The UK’s sustainability agenda will shape the physical environment we live in. We need to meet carbon zero targets and our homes will be one of the biggest challenges. We need to increase the delivery of new homes if we are to provide everyone a safe, suitable, and decent place to live.

The right home should exist for everyone, no matter which scenario we face.

CON TAC T S

MILLIE TODD Research Associate M: +44 (0) 7385 949985 millie.todd@cushwake.com

JONATHAN STICKELLS International Partner Head of Residential Valuation & Advisory, UK M: +44 (0) 7753 310 947 jonathan.stickells@cushwake.com

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