A way through the downturn

It’s official: the us sub-prime crisis has badly infected UK housebuilders. This results season saw some awful figures: £19.5m Taylor Wimpey’s 2007 pre-tax loss, down from a £405.6m pre-tax profit in 2006; 1,262 the number of sales reservations confirmed by Bovis Homes from 1 January to 7 March, down 320 on the same time last year; 8.9% – the fall in Redrow’s first-half revenue on the same period in 2006.

Already the marked downturn is being compared to the great housing crash of the early 1990s. And that’s no real surprise, given that property agents in central Leeds, for example, say prices have fallen 25-30% in the past six months. So bad has it got in Leeds, which was previously viewed as one of the country’s booming regions, that late last year Taylor Wimpey mothballed its 800-flat Greenbank scheme.

While it would be easy for the industry to talk itself into a recession, the market is not as terrifying as it was in 1992, when repossessions, at 75,500, were more than three times higher than they are today, and unemployment was almost double at 10.4%.

But there is a swathe of anecdotal evidence that housebuilding executives have started to implement reactive policies to the crisis in the hope of avoiding a full-blown housing recession. And many of these moves are concentrated on regeneration and affordable housing.

Perhaps most pressing for housebuilders has been the need to cash in on their vast landbanks. An executive at a sheltered housing developer, a niche sector that is far less threatened by the credit crunch, says: “We are talking to mainstream housebuilders who are looking to sell their sites; sites that won’t necessarily generate returns for them. When the sites have outline consents for flats, we can get them modified for sheltered housing quite easily.”

In the early 1990s housebuilders, desperate for cash, sold off houses to the government at knock-down prices and industry insiders believe that this has started to happen again, though the purchasers are now housing associations: “Selling in bulk to housing associations is not the sort of thing housebuilders advertise, as it is a sign of weakness,” says one source.

Tony Pidgley, chief executive of Berkeley Group, adds: “There will be instances when housebuilders will sell to registered social landlords for cashflow.” Similarly, there are rumours that some housebuilders are accelerating the construction of the affordable elements of their schemes – if those elements are segregated rather than pepperpotted – to secure cashflow.

‘Selling in bulk to housing associations is not the sort of thing housebuilders advertise, as it is a sign of weakness’

Industry source

A housing association source jokes that housebuilders are their “new best friends”. At least one major consultancy is talking to housebuilders about rolling out a model of joint-venturing with associations “to reduce risk, assist with cashflow and allow them to continue buying land at lower prices”.

Housing associations can borrow at just 1.5% and housebuilders are struggling to access the capital markets for their own schemes. Working together makes sense, and due to the country’s chronic undersupply of low-cost housing, demand remains high for affordable units. While this does not result in the crazy 20%-plus pre-tax profit that the majors were enjoying in the first few years of the decade, it does guarantee turnover – effectively buying cashflow – in tough times. “These are gilt-edged, guaranteed sales, and in tough markets it looks increasingly attractive,” says one housebuilder.

Shared ownership is another method that housebuilders are exploiting to penetrate the low-cost market. Barratt, for example, last year partnered with London & Quadrant, the housing association, in its successful bid for the £226m Loampit Vale scheme in Lewisham, south London, which includes a tranche of shared-ownership housing. “Shared ownership has been getting increasingly prevalent over the past couple of years,” says Ken Dytor, a leading regeneration and investment consultant. “The housebuilder can also get a joint venture where the housing association has land, getting access to a site that they otherwise wouldn’t see.”

The deluged planning system is also struggling to approve schemes at a fair rate. There is a growing feeling that the government might well accelerate the development of affordable housing by directing councils to look at their planning applications before more commercial schemes – another good reason for housebuilders to get more involved in affordable housing. Former Barratt chief executive David Pretty argues: “My intuition is that any planning concessions in future are likely to mean these types of affordable schemes will get priority in an overburdened market.”

Major housebuilders are generally in a strong position to develop their relationships with housing associations. Over the past few years, housebuilders have been forced to increase the provision of affordable housing meaning that they have stronger links to this market than in the early 1990s. For example, the proportion of affordable housing on new schemes in London has doubled to about 34% in the past eight years. Leslie Kent, a housebuilding analyst at JM Finn, points out: “Social housing is a big part of the cake now – it’s had to be so that housebuilders could get permission from councils for their schemes.”

While this has the benefit of diversifying a housebuilder’s portfolio, there is also a significant downside. Regeneration sites are typically more pricey to develop, as problems such as remediation costs are far more frequent. This is all fine in a rising market, but there are fears that housebuilders could retreat into their shells while the heat is on. “I’d be surprised if some high value regeneration schemes didn’t slow down owing to current market conditions,” sighs Tom Dacey, chief executive of Southern Housing Group.

If that’s as bad as it gets, though, housebuilders will have had a far less rough ride than they did in the last comparable market collapse.