Commercial developers are limbering up, getting ready to take on the residential market – and if housebuilders don't watch out, they could soon find themselves on the ropes wondering what hit them.
Commercial property supremo Gerald Ronson has caused a flurry of excitement by taking a 12.5% stake in housebuilder Crest Nicholson. Whether Ronson is simply out to make money or to buy up the business, the move is indicative of a trend. Commercial developers are homing in on the residential sector.

The HBF voiced concerns to Kate Barkers' review earlier this month that commercial developers could be given "special treatment" to encourage them to undertake more residential development. They don't need much encouragement.

Look at London, the bellwether of the UK property market. In just five large mixed-use schemes, commercial developers have the capability to deliver more than 20,000 homes – that is on a par with the short-term landbank of the country's fifth biggest housebuilder, Bellway Homes. Chelsfield and Crown Estate are among the big names already developing homes in the capital, and a lot more are considering it. They are attacking the housebuilders' market on all fronts, from the intermediate sector in the case of Stanhope's First Base operation to the top of the range in the Crown Estate's homes in Regent Street, which are being touted as potentially some of the most expensive over-the-shop homes in London. And this cross-market assault is being accompanied by fighting talk, commercial developers boasting that they will beat housebuilders at their own game, with homes that are built faster, more cheaply, more efficiently and more innovatively.

Several factors have prompted this sudden interest in residential from the commercial developers. "It is a function of the government's desire to see more mixed use, and because residential values make it good sense," says Andrew Sutherland, director of commercial developer Miller Developments, which does not develop residential itself, but works in joint venture with a range of partners, including sister company Miller Homes.

"Most commercial developers are sniffing around residential," says Yolande Barnes, director of FPDSavills' new mixed-use research unit. "Restrictions on greenfield land have affected commercial developers as much as residential developers. They can't build out-of-town retail centres. Brownfield sites are more urban-based and lend themselves to mixed use, and commercial developers are more used to acquiring urban sites, and better placed to assemble them." The government's desire to see affordable housing integrated into commercial sites has also galvanised commercial developers into action, Barnes adds.

"Housebuilders aren't used to building large schemes, but they've been our bread and butter," says Nick Roberts of Chelsfield, which is working with developer European Land on Paddington Walk, a 153-unit apartment scheme at London's Paddington Basin. "We saw there was a market opportunity here and we wanted to create a mixed-use environment and have control of that. We see there are skills that are transferable [from commercial to residential], and we work with European Land, which has residential skills. It is something we're looking at for mixed-use and regeneration sites."

You can see why housebuilders stuck to houses and developers to offices. Mixed-use is bloody difficult

Yolande Barnes FPDSavills

Paddington Walk includes a number of features that are unusual in residential development (see left) and Roberts believes commercial developers have a different attitude. "Perhaps we bring a more analytical approach. There's a tendency in residential to follow the formula that has worked. We don't have that. We start from quality of design. As design adds value to commercial, so can it to residential, not only internally but also externally. I sense that we have a longer-term commitment that will differentiate us from housebuilders. Paddington has to be a good place to live and work. We have an ongoing commitment to adding value to attract commercial tenants."

Roberts does not expect to be cutting down on build costs at Paddington Walk, but Stanhope believes it can bring efficiencies and cost savings to the housebuilding process and it is aiming to prove it with its First Base operation. First Base is targeting the intermediate market E E in the South-east, the key workers who cannot afford to pay the high prices demanded for new homes around the capital. But in order to bring homes within its £100,000-a-unit target sale price, with no grant or subsidy, it has to reduce construction cost by 20%.

To do that, the company is taking what it believes is a different approach to housebuilding and is innovating in the way land is traded to produce a better product that people will be keen to live in and able to afford. "There are a whole series of things we do in procurement of large buildings that are different to smaller buildings, from pre-planning through to materials procurement," says Elliot Lipton, managing director of First Base.

Off-site manufacturing technology features prominently in First Base's game plan (see below). The company is also exploring different ways of sourcing land, looking at former industrial and employment land now freed up for residential under PPG3, and more radical solutions using a deferred payment mechanism. "There need to be different methods of paying for land, rather than paying it all upfront," says Lipton.

Housebuilders regard First Base's claims with scepticism. "I can't wait to see their first scheme," says Tim Hough, managing director with Miller Homes. Hough says that the answer lies not in residential and commercial developers competing with one another, but with them working together in joint ventures or alliances such as Miller Homes' co-development with Applecross and Miller Developments at Edinburgh Quay in the Lochrin Basin, Fountainbridge, or St George's joint venture with Argent at King's Cross Central – to name but two. "Commercial and residential are different skills. Everyone thinks residential is simple. When I worked in the construction industry, housebuilding was known as cottage bashing. But if you get the layout of residential wrong in a mixed-use city centre scheme, that's 20 end users who are disappointed. Ultimately the design and layout of an apartment have to be sold to people who want to live in it."

What’s so different about Paddington Walk?

In Chelsfield and European Land’s desirable apartment development, open-plan kitchens have been designed as sleek pieces of furniture that buyers won’t be ashamed to have on display alongside their B & B Italia sofas. Ceilings have a shadow gap, which is the kind of detailing you would normally only expect to find in an architect-designed one-off. Comfort cooling units are not in their usual inconvenient ceiling location, but are sited vertically in easily accessible cupboards. These are just some of the most visible differences that make Paddington Walk stand out from the massmarket housebuilder product. Putting a shadow gap into the ceiling would be considered an unnecessary additional expense by many housebuilders, but to Howard Wright, development consultant for European Land, it is not profligacy, but value for money: “The idea for it came from the contractor’s man on site. He’d come up with a cheaper way of doing it. It costs £1000 a flat. We cost each feature and get estimates for different scenarios.” The comfort cooling unit has been designed specifically for this scheme. “If you stick it in the ceiling it causes huge amounts of heartache and hassle, so we had an engineer design a vertical unit. For the next building we’ll have a unit that pulls out on filing cabinet style runners,” says Wright. The development team is taking a commercial building approach to the services, rationalising wherever possible. That rationalisation culminates not in the usual row of individual and difficult-to-align sockets in the lounge for power, television and communications, but in a bank of six sockets faced in a single clip-on plate. During construction, there are plans to fit apartment front doors with electronic locks with a memory capacity. “It will replace the keyman, and the memory will allow tracking of who has been in and out of the flat. The contractor sees it as a useful management tool,” says Wright. When apartments are complete, buyers will be able to have a standard door lock or upgrade to the electronic system. When flats are near complete, they will be snagged by a separate group of operatives Wright calls the slipper team. “They know their job is to leave the place perfect. You can’t ask a site manager to manage that because it is not productive time for him,” he says. “We don’t do that in offices, but there we can call a subcontractor back. That doesn’t work in residential as you don’t have the same control.” The development team accepts that it hasn’t got all the details right first time – initially, one show apartment bathroom included a towel rail directly above the bath that could have given a carelessly relaxing bather a nasty bump on the head – but they are learning fast.

A lesson from Elliott Lipton

First Base’s construction approach includes:
  • Integrating its team, with developer, architect, construction manager and principal trade contractors working side by side as a partnered team.
  • Building a 3D model for every project based on around 10,000 actions that would be carried out on site. Mock-ups are built for key elements of the building.
  • Logistics planning from off-site centre.
  • Standardised elements, not standardised design.
  • Investigating off-site manufacturing for items ranging from baths or basins with taps and waste pre-installed using snap-fit connections through to whole walls.
Its design approach starts from internal space planning, applying housing associations’ understanding of:
  • Low lifetime cost, rather than just low initial cost
  • High-quality, reliable product
  • High levels of community services offered at affordable prices
  • Cost-effective, long-term management and maintenance
  • Security
  • Socia
  • impact
  • Tenure.

The contenders: Heron International

Heron International chief executive Gerald Ronson (pictured) has caused a flurry of speculation by taking a stake in Crest Nicholson, but this is not the first time the company has taken an interest in housebuilding. Heron, which was founded in the 1960s, has in fact developed more than 15,000 homes and retains an involvement in the sector through its Heron Land Developments arm, which is principally involved in land dealing. Whether Ronson's approach to Crest Nicholson marks the start of a serious bid is as yet unknown; Crest Nicholson has invited Ronson to talk, but the property guru has so far turned down the offer.

The contenders: Stanhope

The company announced plans to enter the residential market last year, with claims to be able to cut housebuilding costs by 20%. The new business, called First Base, is headed by Elliot Lipton, son of Stanhope founder Sir Stuart. It is negotiating to buy three London sites so far, but its most obvious target location must be the Stratford City scheme it is working on with Chelsfield and London & Continental Railways, which is expected to have 4500 homes. It plans to build 32-40 m2 one-bedroom units in five- to seven-storey buildings. It has already gone through a product review process with a range of consultants including: Davis Langdon & Everest, Arup, Richard Rogers Partnership, Alford Hall Monaghan Morris, Laing O’Rourke, Bovis Lend Lease and Adams Kara Taylor.

The contenders: Argent

The force behind the pioneering Brindleyplace scheme in Birmingham now has its sights set on the redevelopment of King’s Cross Central in a 50:50 partnership with residential partner St George. King’s Cross Central will include 1800 homes. Argent is also developing the Piccadilly Place mixed-use scheme in Manchester, which includes 118 apartments.

The contenders: Chelsfield

Chelsfield’s Paddington Basin scheme will have about 1100 private and affordable homes alongside shops and offices. Although the first residential project at the Basin, West End Quay, was carried out by Rialto, WestCity and Wates in a joint venture, Chelsfield is working with European Land on Paddington Walk and the upcoming tower, The Windings.

The contenders: The Crown Estate

The stately Crown Estate’s makeover of Regent Street includes 10,000 m2 of residential on the Quadrant site at the southern end of the street. Affordable housing will be incorporated into the mix.

The contenders: Quintain

This is the really big player, with the massive-scale mixed-use projects at the Millennium Dome and Wembley Stadium sites in its hands. Wembley will have 3700 homes, while the dome site will have more than 10,000. However, the developer is unlikely to carry out its own residential and is already working in a residential/hotel scheme in Colliers Wood, south London in joint venture with Countryside Properties.