Future of Cities - Future of UK Housing Supply 2022

THE FUTURE OF UK HOUSING SUPPLY

2022

I N T ROD U C T I ON

This report aims to explore how the fundamental shifts we will see over the next few decades will affect how we live, and therefore the real estate we need across our cities. This will require changes to our existing housing stock, but more importantly alter the requirements for housing delivery across the UK. This report looks to paint a picture of how our cities might look in the future, and analyse how this will shape our homes, where we live - and how they are delivered.

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. At present, as a result of strong inflationary pressures brought on by the pandemic, households across the UK are experiencing a cost of living crisis that affects day-to-day lifestyle decisions. These pressures will impact affordability and housing delivery in the near term. In the long-term, they will influence sociological change. From relatively minor daily activities like where we shop to more fundamental issues like how we provide energy to our homes. This is just the tip of the iceberg.

These changes will need to happen now, rather than later.

2 The Future of UK Housing Supply |

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

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.

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. 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.

LOW CERTAINTY

HIGH CERTAINTY

THE RATE OF URBANISATION (OR DE-URBANISATION)

ENVIRONMENT & ENERGY

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

AUTOMATION

SOCIAL CHANGE

3 The Future of UK Housing Supply |

By plotting a grid formed from our critical uncertainties, we define four strawman scenarios for the city of 2040. F U T U R E O F C I T I E S

HIGH VIRTUALISATION

• High virtualisation & low urbanisation • Society lives more remotely and commutes less often • Life continues as it did during COVID-19 • Emphasis on hybrid working via Zoom, Metaverse • Focus on time saving and convenience • Physical interactions are now more purposeful

• High virtualisation & high urbanisation • 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 • Tech has amplified human connections, not reduced them

HIGH URBANISATION

LOW URBANISATION

• Low virtualisation & low urbanisation • 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

• Low virtualisation & high urbanisation • The best cities are dense and diverse magnets • Cities remain pretty similar and unaltered • Working from home has been rejected

LOW VIRTUALISATION

4 The Future of UK Housing Supply |

WHICH SCENARIO 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 Grid 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, The Grid scenario is likely to be popular with those who are pro-tech, introverts with long commutes, and young families.

5 The Future of UK Housing Supply |

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 four strawman scenarios which we have a higher level of certainty, 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.

6 The Future of UK Housing Supply |

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).

Source: LETI

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

8 The Future of UK Housing Supply |

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 initiatives such as the Future Homes Standard, which requires all new homes built after 2025 to emit 75 80% less carbon dioxide, will assist the UK in moving in the right direction. OF NEW HOMES DELIVERED HAD AN EPC OF A OR B IN 2021 84%

WHAT’S NEXT

Carbon neutral cities will be the norm by 2040, and life cycle 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 renewables, and we need to train the workforce to deliver and maintain the alternate energy sources and new building methods.

9 The Future of UK Housing Supply |

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. Fundamentally, there is a requirement for additional homes to be delivered. While commercial real estate grapples with the need to retrofit rather than redevelop, this is only a small part of the solution in the residential sector considering the scale of additional housing that is needed.

Over the last two decades, the diversity of residential stock in the UK has increased significantly, owing to the introduction of PRS and the more nascent co-living, as well as an increase in the supply of purpose-built student housing and senior living. This diversity of accommodation only needs to increase if we are to better match the needs of the population, and better drive social value through the delivery of real estate.

Current housing delivery targets have not been reached - on average we are 60,000 homes short per year of the stated 300,000 target. The effect is not only one of a mismatch between supply and demand, which puts home ownership out of reach for an increasing proportion of the population. Undersupply increases the number of people living at home for longer periods of time, impairs labour mobility, and increases levels of homelessness.

HOMES DELIVERED PER YEAR

300,000 240,000

TARGET

HOMES SHORT PER YEAR 60,000

DELIVERY

Source: Department for Levelling Up, Housing and Communities

11 The Future of UK Housing Supply |

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 ?

HOW THE PLANNING SYSTEM CAN BETTER ENABLE SUSTAINABLE, LONG-TERM DEVELOPMENT

A successful planning system should govern what is delivered. Planning should ensure design standards are met, appropriate materials are used, transport matters are considered, townscape impacts are assessed, the right amenity space is provided, infrastructure requirements are well-thought out and so much more. A well governed planning system will ensure we deliver suitable homes for the city of 2040. Delivering additional homes is essential. A nimble bottom-up planning system can better enable sustainable, long-term development in our cities.

The planning system has an important role to play in enabling the right homes to be delivered in our future cities. Over the last five years, an average of 308,000 homes have been granted consent each year in England. However, we are only seeing this transition into 240,000 completed new homes. The complexity of delivering homes means some applications have to go back into planning to be revised, while others see their planning permission lapse. We therefore need to feed the delivery pipeline with a greater number of planning permissions if we are to increase housing delivery rates. Making site-by-site planning decisions is time consuming. Local plans should be agreed upon amongst communities, local authorities and developers, enabling nimble planning decisions to be made. These visions should be regularly assessed, allowing plans to adapt to the fundamental shifts we expect to see over the next few decades.

AN AVERAGE

ONLY

308,000 HOMES HAVE BEEN GRANTED CONSENT EACH YEAR IN ENGLAND

240,000 ARE TRANSITIONING INTO COMPLETED NEW HOMES

Source: Department for Levelling Up, Housing and Communities

12 The Future of UK Housing Supply |

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 ?

HOUSE BUILDERS INCENTIVES

In the early 1970s, close to 300,000 homes were being delivered, c.40% of which were through local authorities. This now stands at only 1% (DLUHC). House builders now deliver the majority of homes but they have not fully replaced the number of homes previously delivered by local authorities. 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 increase (ignoring other economic and geopolitical headwinds), and house builders are reluctant to undermine this. We need to find new ways to encourage private house builders to deliver more homes, especially with economic headwinds signalling a slower housing market, which is usually associated with lower levels of construction.

NUMBER OF NEW HOMES COMPLETED

13 The Future of UK Housing Supply |

A FOCUS ON AFFORDABLE HOMES IS NEEDED

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). 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, with the number of for-profit registered providers increasing from 29 in 2016 to 69 in 2022 (Regulator of Social Housing), and we expect this to grow.

Industry consensus is that 145,000 affordable homes are required to be

OF HOUSEHOLDS LIVED IN SOCIAL RENTED HOMES THIS NOW STANDS AT 17% 32% delivered each year. Research by the BPF and Legal & General calculated that increasing the delivery of affordable homes from the current supply of 52,000 per annum to the 145,000 target would require an additional £14.2 billion of subsidy per annum. Subsidy will help attract investors, but there are other (stronger) reasons for institutional interest. As well as creating social impact, investors have been attracted to the sector due to its long-run record of delivering stable returns, and limited voids. FORTY YEARS AGO

14 The Future of UK Housing Supply |

REPURPOSING PRESENTS AN EXCITING OPPORTUNITY

SPEED UP DELIVERY

The social and demographic shifts outlined above will drive changes in our real estate needs. The shifts in the way we live, work and play have already altered the way we engage with our cities - with the changes on the high street and our shopping centres being the most obvious examples. The repurposing of under-utilised assets will be essential. In the 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 ‘brownfield first’ approach and sustainability agenda and therefore seems an obvious route to take.

Residential construction is characterised by low productivity, mixed quality, slow output, and reduced margins for house builders. 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, this vastly alters the landscape for increased residential development.

15 The Future of UK Housing Supply |

16 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. Consumer demands will continue to evolve, and we need to be able to adapt our homes to accommodate a range of future scenarios.

17 The Future of UK Housing Supply |

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 entered 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.

50%

THIS IS NOW

FEMALE AVERAGE (MEAN) AGE OF FIRST MARRIAGE IN THE UK IN 2011 WAS

36

OF WOMEN WHO WERE BORN IN 1990, DID NOT HAVE CHILDREN WHEN THEY TURNED 30

34

MALE AVERAGE AGE IN 2011 WAS

THIS IS NOW

18% BORN IN 1941

38

36

COMPARED TO

Source: ONS, England & Wales

Source: eurostat

18 The Future of UK Housing Supply |

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.

STUDENT ACCOMMODATION There are now a record 2.18 million full-time students studying at UK universities, which has set a new record for higher education demand. In England, an additional 430,000 higher education places are projected to be needed by 2040 (HESA & HEPI). We expect to see strong growth in the purpose built student accommodation sector, allowing students a greater choice in university living options. CO-LIVING Co-living offers community-centric living for single households. These homes often appeal to people who are new to the city and looking to build up a network. Co-living helps address loneliness and encourages social interactions and new relationships through communal spaces and events. The all-inclusive nature and flexible lease lengths attract footloose residents and the growing number of digital nomads. The mid-market will provide affordable homes within a short commute of cities and towns. There is a shortage of affordable rental homes across the UK and the imbalance between supply and demand has and continues to push up rents. Strong rental growth has resulted in a lack of ‘affordable’ homes for those on middle to low 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 With nearly two-thirds of UK renters living in rural or suburban locations there is a huge need for a greater choice in rental accommodation outside city centres. Single Family Housing (SFH) offers renters a well-managed and high-quality home. SFH is likely to appeal to older renters and families who tend to want a longer lease length, often tied to schools and local communities. Investors also benefit from long leases, with lower turnover, fewer voids, and less gross-to-net leakage. INTEGRATED RETIREMENT COMMUNITIES The population aged 65+ is set to increase from 11.2 million today to 17.2 million by 2040 (The Mayhew Review, ilc). The ageing population need suitable homes to help them stay healthy for longer and have access to the appropriate level of care. Integrated Retirement Communities (IRC) will support retirees’ lifestyles, providing restaurants, cafes, hairdressers, gardens, events, and 24-hour on-site care. Retirement homes will be close to town centres, helping create integrated, safe and social communities. The Mayhew review recommends 50,000 new retirement units should be built a year. Building more IRC will help free up housing lower down the ladder, for each bedroom added to the retirement stock, two to three are released in mainstream housing market. BUILD-TO-RENT We have started to see diversification of Build-to-Rent products.

19 The Future of UK Housing Supply |

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 workers desire more flexibility. 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.

20 The Future of UK Housing Supply |

CON C LU S I ON

The planning system will better enable sustainable long-term development.

The real estate industry has an essential 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 net 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 with a safe, suitable, and decent place to live.

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

CON TAC T S

MILLIE TODD Research Associate Head of Residential Research, UK

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

M: +44 (0) 7385 949 985 millie.todd@cushwake.com

21 The Future of UK Housing Supply |

ABOUT CUSHMAN & WAKEFIELD

Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with approximately 50,000 employees in over 400 offices and approximately 60 countries. In 2021, the firm had revenue of $9.4 billion across core services of property, facilities and project management, leasing, capital markets, and valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.

This report should not be relied upon as a basis for entering into transactions without seeking specific, qualified, professional advice. Whilst facts have been rigorously checked, Cushman & Wakefield can take no responsibility for any damage or loss suffered as a result of any inadvertent inaccuracy within this report. Information contained herein should not, in whole or part, be published, reproduced or referred to without prior approval. Any such reproduction should be credited to Cushman & Wakefield.