With Barratt and Redrow joining forces in the first deal of what some expect to be a wave of industry consolidation, Joey Gardiner looks at whether the ground-breaking merger is likely to help or hinder the government’s chances of hitting its sky-high 1.5m housebuilding target
In the days immediately following the election of the Labour government, major housebuilders were pulled into Downing Street by the chancellor, Rachel Reeves, alongside utility firms and infrastructure contractors, to be told of the new government’s ambitions for the sector. Labour wants to see 1.5 million homes built across the parliament – implying an average annual build rate of 300,000, a number that hasn’t been hit even once in over 50 years.
Such is the ambition, housing quango Homes England is “pushing very hard” for partnerships housebuilder Vistry to build 30,000-40,000 units per year, according to Greg Fitzgerald, executive chair of Vistry. If delivered, that would be twice the volume that any UK housebuilder has previously reached.
In this context, it is perhaps no surprise that Barratt chief executive David Thomas has been stating that he believes the merger with Redrow – which has just got final regulatory clearance – is about accelerating growth. He said at Barratt’s results this month that the £2.5bn merger with Redrow will “help us to address the country’s housing shortage” by “accelerating delivery” more quickly together than each of the firms could have on their own. This will happen, he said, by allowing Barratt to “improve asset turn” – City speak for building out sites more quickly.
Bellway’s abortive purchase of Crest Nicholson, abandoned during due diligence over the summer, plus Legal & General’s sale of Cala Homes last week, indicates the likelihood of a wave of consolidation in the sector beyond Barratt and Redrow – meaning the impact of big firms getting bigger could be significant.
The problem is that history suggests housebuilder consolidation does not deliver unit expansion. Analysts suggest that the usual outcome in terms of homes delivery is either no difference or a small reduction in supply. And either way, Barratt on its own reduced its output sharply in the year to June and is forecast to reduce output again in the current period. Is there any reason to suspect that Barratt and Redrow will be able to break the mould and actually use their tie-up to increase housebuilding supply?
Difficult to believe
The last six months in the housebuilding market have been dominated by talk of mergers and acquisitions, ever since Barratt and Redrow announced in February they had agreed terms on a tie-up. With both the market and political fundamentals improving after two years of hard grind for the sector post-Truss, potential deals are on the cards at prices that look to be tempting for both buyers and sellers (see The case for mergers panel).
Bellway looked set to be taking on the troubled listed player Crest Nicholson for much of the summer before cancelling the £702m purchase in August prior to making a formal offer, with analysts concluding that it felt the risks of the deal were too high.
It’s very difficult to see how a merger like this is going to end up producing more homes
Christine Whitehead, London School of Economics
Meanwhile, fast-growing private equity-backed housebuilder Avant Homes has been linked with potential purchases of both Crest and Cala Homes (the latter of which was sold last week to separate investors).
Some, however, argue that the sector is already quite concentrated enough, with the 12 largest firms, including the eight major listed players, producing almost 95,000 houses in 2023, close to half of all UK supply. The last government commissioned the competition regulator to look into the sector, with former housing secretary Michael Gove at one point voicing fears that big builders were a “cartel” blocking progress on supply – albeit the regulator’s study ultimately found little evidence of anti-competitive practices.
Despite this finding, some caution that further market concentration, by reducing competition further, would tend to see the industry build less overall. Christine Whitehead, emeritus professor of housing economics at the London School of Economics, believes the “structure of the industry” is already “very worrying” in terms of its concentration. “It’s very difficult to see how a merger like this is going to end up producing more homes,” she says. “It’s very difficult to believe because there isn’t going to be the competition [that there was]. They don’t have as much of an incentive to build out.”
The Barratt-Redrow deal comes over 15 years after the last major wave of consolidation, which saw Barratt take over Wilson Bowden, and George Wimpey merge with Taylor Woodrow. Alastair Stewart, research analyst at Progressive Research, says: “In the past it has always seemed to be with housebuilders that, in terms of volume, one plus one made slightly less than two.”
However, Stewart adds: “Now Barratt seems to be saying it can add one and one and get more than two, albeit not massively. In theory, what they’re saying does allow this to work.”
Double sales rate
Barratt’s David Thomas laid out his strategy for achieving this at the firm’s recent results call, saying the industry faced the “challenge in accelerating delivery and restoring asset turn against the backdrop of the lower reservation rates we’ve seen since the autumn of 2022.” His point being, that if home buyers around any given site are only buying at a rate of two or three homes per month, given elevated interest rates, it is very difficult for a developer to build at a speed that outpaces those sales without totally destroying any sales margin.
More choice of homes stimulates more buyer demand. If you’ve got a housebuilder choosing to use multiple branding on a site, then that should be positive for accelerating delivery
Jan Crosby, Savills Capital Advisors
But with Redrow selling its homes to more upmarket buyers than does Barratt, Thomas’s proposition is that the acquisition allows it to sell an entirely different product on the same site alongside the Barratt homes (and potentially also David Wilson homes, a mid-market brand Barratt also owns).
The claim is that this ability to “dual-brand” or even “triple-brand” sites means they can appeal to multiple distinct buyer markets simultaneously, which can massively increase the rate of sale and build-out on a site. Thomas cited one site, called Grey Towers Village, in Nunthorpe, Middlesbrough, as an example of what might be possible post-merger. He said completions rose by 110% and the sales rate doubled after the firm introduced Barratt-David Wilson dual-branding.
“We’ve seen, through David Wilson and Barratt, that applying a multi-brand strategy drives the ability to have more sales outlets, unlock a greater number of home completions, make our landbank more efficient, and ultimately improve asset turn,” said Thomas. This strategy accords with the logic of the Independent Review of Build Out by former MP Oliver Letwin, which argued that by improving the diversity of types and tenures of homes on large sites, the rate of delivery of housing could be improved. “We’re excited about what three brands might do – particularly our ability to accelerate sales outlet openings,” said Thomas.
Paul Smith, managing director of promoter Strategic Land Group (SLG), agrees the strategy has potential. “This makes it much easier to double-head sites,” he says. “So yes, you can deliver much more quickly. There could be a spike in delivery.” Jan Crosby, director at Savills Capital Advisors, says: “More choice of homes stimulates more buyer demand. If you’ve got a housebuilder choosing to use multiple branding on a site, then that should be positive for accelerating delivery.”
However, Barratt is not currently able to put any numbers on how significantly the merger is expected to increase supply by, as it is barred from putting any forecasts out while it is still awaiting regulatory approval for its combination. But evidently it will be going some distance backwards before it can go forwards. As Barratt alone, its build supply of 14,000 homes was already 3,000 homes short this year on the year before, and the firm has said this could fall by as much as another 1,000 homes next year, given its decision to stop investing in new land over the last couple of years. This means that even with the contribution of somewhere around 4,500 homes from Redrow, the combined business is likely to start life only very barely bigger than standalone Barratt was in 2022.
Tram lines
There are other rationales for why the combined firm could be able to accelerate. Barratt has said the merger will allow it to find £90m in “synergy” savings, including £34m from more efficient procurement, and £33m from cutting duplication of offices, with the rest from back-office costs. This increased margin could allow greater investment in development. However, Yolande Barnes, chair of the Bartlett Real Estate Institute, says while this will give the combined firm “greater financial firepower and greater bidding power”, meaning it will face reduced competition for land, this does not necessarily translate into greater numbers. “It’s good news for the individual company but it doesn’t touch supply in the rest of the market,” she says.
The challenge has always been to maintain delivery post-merger. The tendency is that volumes peak immediately after and then drift down
Paul Smith, Strategic Land Group
Adrian Kearsey, managing director and research analyst at investment bank Panmure Liberum, says a historical analysis over the last half-century supports Barnes’ view. Private housebuilders, he says, have built a broadly consistent number of homes over that period, within a band of plus or minus 25%, throughout the various economic cycles. This is despite massive consolidation in the sector, which 30 years ago was dominated by SME firms. “Private sector completions are relatively consistent, dependent on the market,” Kearsey says. “Over the last 50 years there has been consolidation, but their overall activity hasn’t changed dramatically.
“If they haven’t stepped out of their tram lines previously, you have to ask, why would they now? If they build more, it destroys their margin.”
Likewise, professor Noble Francis, economics director at the Construction Products Association, adds: “On a general basis, the mergers don’t particularly have a significant impact on housing supply,” arguing that factors such as planning constraints and demand are much more pertinent.
So, why do people think it unlikely Barratt can pull off its promise? SLG’s Paul Smith thinks that while dual-branding might initially work to increase output, this is hard to sustain. “The challenge has always been to maintain delivery at that level post-merger. The tendency is that volumes peak immediately after and then drift down.”
Cost-cutting
He argues one of the key issues is that by rationalising land-buying, merged firms tend to reduce their combined chances of winning a land bid – where before they may have been two out of five bidders, say, now they are one out of four. “You’ve got to buy land, but your volume is constrained by the number of sites you can feed through,” he says. “It gets to the point there is limited competitive advantage in being bigger.”
In addition, Andy Hill, chair of privately owned housebuilder and contractor Hill, says merged firms typically struggle to deliver on dual-branding strategies over time, as the desire to centralise and seek procurement savings acts to reduce any original brand distinctiveness. “Redrow has an absolutely superb range,” he says. “But if you look 10 years into the future, will it still be as distinctive? Usually in mergers, one brand tends to dominate and the centre looks to cut costs.
“It’s not great news for the country in terms of unit numbers, or in terms of choice of product.”
Most commentators view other factors as much more relevant than industry mergers if the government is to make significant inroads into its distant 300,000 homes-a-year target – with Capital Economics predicting net additions of new homes falling as low as 195,000 in the current year.
This implies the government looking at policy measures to boost demand, such as Help to Buy, and promoting other types and tenures of housing beyond traditional private homes for sale. UCL’s Barnes, for example, says: “If you want to increase capacity you have to massively increase diversity of supply. You’ve got to massively expand the players in the market. At the moment all our eggs are in the basket of one development model.”
The case for mergers
Traditionally, housebuilder mergers are primarily motivated by the acquisition of land. “Whatever they say in public,” says Paul Smith, managing director of promoter Strategic Land Group, “mergers are always mostly about land.” Professor Yolande Barnes, chair of the Bartlett Real Estate Institute, says it’s a “natural response to the fundamental lack of land.” Alastair Stewart, research analyst at analyst Progressive Research, says: “Obviously housebuilders are looking for land at the moment, particularly given the slow pace of the planning system.”
That’s not to say that other factors are unimportant. Stewart says being larger makes it easier for firms to handle the costs of promoting sites through the planning system, while Barnes says greater size gives firms bigger financial clout generally, including more procurement power in the construction market. Larger firms look to save money by centralising back-office functions.
Jan Crosby, director at Savills Capital Advisors, says a particular driver for deals on the cards now, however, is around the state of the market and the potential price. For the last couple of years residential developers have suffered from poor valuations, which Crosby says will have made their owners disinclined to sell up. However, the improving prospects for the housing sector, given interest rates dropping and political support, means valuations have shifted. “More people are now looking [at buying housebuilders] than have been, really, ever. The question is whether pricing has shifted enough to make it interesting for the sellers.”
“There will definitely be more deals.”
James Pargeter, senior adviser at build-to-rent housing specialist GAA, says: “Having most of the volume tied up with a single large entity doesn’t seem entirely sensible given the variety of need in the country, and the need to meet that. A key component of expanding supply will be embracing a variety of tenures.”
Hence the recent volume growth of partnerships provider Vistry, which prioritises building affordable homes and homes for private rental on its sites, over homes for sale. While Vistry might have taken a big knock to its value after revealing £115m of cost overruns on nine large projects, it has unarguably used this alternative business model to grow to an annual run-rate of 18,000 homes at the same time as the output of traditional volume builders has declined. Building understands that Homes England has been privately putting pressure on other housebuilders to take on the Vistry business model. “For there to be a step up,” says Panmure Liberum’s Kearsey, “the government will need to look at business models and look at the mix between social housing and private.
However, even with a multi-tenure strategy, expanding supply cannot be immediate. Savills’ Crosby says: “You can’t put an accelerator on a supertanker and expect it to be a speedboat. It will take time.” A round of industry consolidation appears unlikely to get Labour any closer to its manifesto target.
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