To Build The Right Homes In The Right Places, Data Is The Only Answer

The UK has a problem: Although homes are being built, research suggests that too many are for the wrong people in the wrong locations.

The industry’s lack of knowledge about the demographics of urban areas is not only creating unbalanced communities, but causing developers to miss out on revenue growth. These are the findings from data-driven business consultancy CACI.

“If the market is left to its own devices, it won’t get the balance right,” CACI principal consultant Tolga Necar said. “Without guidance, neither developers nor local authorities can know how to build the right homes in the right places for the right people. Today, data gives us a great new way to understand with much deeper granularity the demand and audience.”

Until recently, the real estate industry has only been able to base decisions on market activity, Necar said. Namely, how many houses have been built where, at what price. In a housing crisis and an economic background of low interest rates, this has generally worked out well for developers and homes have been sold or rented out.

However, against a tougher economy, more information is needed to create strong, balanced communities while maximising revenue. CACI is in a unique position, holding data that reveals the demand that sits behind the residential market, Necar said. 

“When we extract information about the relationship people have with their locations and what they need from them, we can optimise what is built to maximise opportunities,” he said. “Data can highlight where there is an imbalance of residential and commercial properties and opportunities where there may be a shortage.”

To illustrate where there is an imbalance between supply and demand, CACI analysed all new homes built in the last five years by location. The team then used their geo-demographic segmentation tool called Acorn to create a picture of the people most likely to live in those homes. 

CACI’s analysis showed that the delivery of homes in urban locations where high earners typically live — such as those classed by Acorn as “executive wealth” and “career climbers” — exceeds demand. People classed as “city sophisticates” have 3.9% of current homes, but 6.3% of homes that will be built in the next five years will be where these people live. This suggests that in five years’ time, there will be too many homes for this group of people.

“If you’re building too many apartments in urban locations for people classed as ‘city sophisticates’, in order to fill them you’re going to have to start selling to people who can’t afford the price you target,” he said. “That suppresses the returns a developer can expect.”

In contrast, homes for the Acorn demographic groups that are less affluent, such as “poorer pensioners” or “struggling estates”, are seeing lower levels of growth. While “struggling estates” makes up 5.9% of current homes, only 0.9% of homes in the next five years targets this group. This isn’t good for communities or for the property developers, Necar said.

CACI also assessed house prices against affordability, using a house price-to-earnings ratio as well as metrics such as savings and investments. Many urban areas in the south east and east of England have homes for both sale and rent that the general population cannot afford.

In Berkhamsted, Hertfordshire, for example, average earnings are £64,760. In general, total mortgage affordability is 4.5 times income, and when CACI factored in average savings, this suggests an affordable home would cost £363,126. In reality, the average house price in Berkhamsted is £755,666.

Turning to rent, the average annual private rent in Berkhamsted is £19,453, which creates an earnings-to-rent ratio of 30%. This is much higher than the national average ratio that people can afford of 25%, Necar said. This has been exacerbated recently by a shortage in rental homes as many private landlords sold properties due to legislative changes. 

“If new rental homes are being built in areas where people are affluent, that’s not going to help to reduce rent as a proportion of income levels,” he said. “Essentially, there is a large population of people for whom the private rental market is almost unattainable.” 

While these calculations highlight areas with affordability problems, which could hinder developers’ ability to sell or rent out homes, they also highlight opportunities to increase rental income, Necar said. He cited Derby as an example. 

At the moment, people in Derby are generally paying 21% of average annual income on rent, below the national average of 25%. Using demographic data, CACI can see that there are many affluent families in Derby, who may be willing to pay a higher rent for a premium product.

“This is where it is important to understand the audience, not just what has been rented before,” he said. “We can identify areas where there is scope for potential stretch in what people are currently paying. Perhaps average rent in Derby is only £693 because nothing has been built that is worth £800. This is a potential opportunity for a developer.”

Using this data isn’t just about finding development opportunities, Necar said. It’s about finding opportunities to create strong, resilient communities with the right level of housing. In some areas, that will mean building premium housing while in others more affordable housing. To understand what is needed, developers need to consider who lives in each area including where they work, where they live, which schools their children attend.

CACI's data shows that when people move, 50% of people move less than 2 miles. Information about people's ties to their location needs to be acknowledged in the design and planning process, Necar said.

But creating places that meet people's needs goes even further than that. As well as residential information, CACI analyses data on what other property uses people need to create a balanced community.

“Building the right homes, in the right places, at the right tenure types and models, is a big step in the right direction, but we have to acknowledge that homes in and of themselves do not create a community,” Necar said. “People need places to shop, to eat and socialise. They need community services and amenities and they need infrastructure that connects them all together.”

If a developer is able to gather data to use on all aspects of people and their lives, they will be able to understand what communities need, Necar said. The result will be much stronger communities.

This article was produced in collaboration between CACI and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.