The major housebuilders are blamed for not building enough houses, but if the odds were not stacked against small and medium developers, they would be there to help drive up volumes
I recently re-read British Housebuilders by Fred Wellings. The book records the history of housebuilders and is well worth a read if you are interested in the nature of housebuilding and the changing landscape of the industry over the decades. The book takes on even greater significance in the current climate where policy makers and others are quick to criticise the industry for its perceived inability to increase supply quickly enough in the face of a housing supply crisis.
The devastation caused by the 1974 and 1990 recessions, with over 40 significant bankruptcies, amply demonstrates the risks of overtrading in a cyclical market. More recently the 2008 credit crunch practically brought the whole industry to its knees. However, after six years of relatively stable growth, memories quickly fade. The housebuilding industry is now regularly accused of land banking, restricting supply and expecting unreasonable profit margins.
During my 30 years in the industry, I have not encountered any housebuilders which do not seek to commence development on consented land as quickly as possible. Indeed, major housebuilders are driven to improve their return on capital employed and the only sites laying fallow are those where conditions are still being cleared or where viability remains challenged.
We are always vulnerable to a fall in buyer and investor confidence, even if all the other fundamentals of the market are sound
The immediate aftermath of the Brexit vote reminded us all of the susceptibility of housebuilding to macro-economic events. We are always vulnerable to a fall in buyer and investor confidence, even if all the other fundamentals of the market are sound. Headlines anticipating a double digit fall in house values, no matter how far from reality, demonstrate why the industry needs to maintain a sustainable buffer. We must seek to protect our shareholders and financiers as national and international events unfold.
At its heart housebuilding is a highly speculative business where the returns need to match the high capital required to acquire land and deliver homes. Despite this, all the major housebuilding companies have increased production at unprecedented rates over the last six years.
The top 10 homebuilders now account for nearly 60% of housing starts; an unhealthily high proportion of overall UK housing supply. However, with the exception of London, and its plethora of international developers and regeneration specialists, there are no new entrants of scale into the wider housing industry.
Where are the medium-sized developers seeking to challenge the “majors”? Why do SMEs remain in terminal decline? Where are the new models of housing delivery which will help drive volumes up to 240,000 dwellings per year?
Barriers to entry and delivery at scale include:
- It takes too long and is far too costly to build up an adequate supply of permissioned land within an efficient operating area. Away from city centres, developers need 10 to 15 outlets in delivery (within an hour’s drive time) to provide continuity of sales and an efficient delivery model.
- There is too great a risk and uncertainty in planning for small and medium-sized developers. The removal of red tape does not overcome the serial challenge of the ever-increasing cost and political uncertainty associated with the promotion of planning applications.
- There are inadequate overhead and profit margins for the risks involved. Counter to the prevailing view of many, profit margins of circa 20% of turnover are not sufficient to stimulate growth in SMEs and medium-sized developers which carry higher overheads.
- It is too difficult for smaller developers to compete with the efficiencies of larger developers. Yet viability consultants repeatedly seek to impose the overhead and profit returns of the larger companies into planning gain negotiations. This leaves little or no economic headroom for the smaller, less efficient, niche players to access the land market.
- There is a real shortage of development and management skills in the industry capable of navigating a complex and prescriptive housing regulation and delivery “system”.
One solution could be direct commissioning by the public sector. This has the advantage of potentially accessing the supply chain capacity of the wider construction industry, not traditionally associated with residential delivery. The critical question to be faced, however, is who will carry the sales risk throughout the life of the project and whether, without the benefits of scale arising from an adequate breadth of outlets, such delivery can be cost effective?
In conclusion, until the cost, uncertainty and complexity of the planning process eases significantly, it is difficult to see how the capacity of the wider housebuilding industry will grow at the scale necessary to cope with demand. There remains a serious risk that a planning system which seeks to limit reward to landowners, and developers alike, will inadvertently undermine new entrants into the market and act as a serious disincentive to the recovery of SMEs.
Chris Tinker is executive board director and regeneration chairman at Crest Nicholson
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