The wolves at the door

The game of spot the British housebuilder won’t take very long at next week’s Mipim property show. Barratt, which builds 20,000 homes a year, will send one representative to the world’s leading property conference, though that is one more than its leading rivals Persimmon and Wimpey.

Bovis Homes and Taylor Woodrow Homes will also be absent, leaving Crest Nicholson and Countryside Properties as the only volume housebuilders with a significant representation at the Cannes jamboree. Even registered social landlords are ahead of them; they are sending a record number of delegates to Mipim this year.

These strange absences will fuel speculation that British housebuilders have become too inward looking, considering only those in their own sector as rivals at a time when commercial developers are building houses in increasing numbers. The growth of mixed-use schemes means that the traditionally separate markets of the housebuilder and commercial developer have crossed – and that the commercial developer is winning the war to take over this new sector.

The upheaval

The figures are pretty stark. Agent Savills’ landbank database shows that 21% of large strategic sites are owned by commercial developers; housebuilders own 8%. “The commercial developers are outcompeting the housebuilders on these sites,” says Yolanda Barnes, Savills’ head of mixed-use research.

These large sites are vital for new housing provision – 8% of sites accounted for half of all the housing units granted permission in 2005. Barnes says: “I don’t think the government realises how little they rely on the housebuilders to deliver their [housing] programme.”

This threat is emerging at a time when housebuilders are in a state of major upheaval. Merger mania is such that there have been predictions that only three of the top 10 housebuilders will exist in their current form come the end of this year. Venture capitalists are entering the market, viewing it as just another property investment with which to make profits from seemingly secure margins. As a result, it could be that housebuilders have taken their eyes off the ball. “You have to go back to the early seventies since the last major change in the industry, when housebuilding companies were realising that it made sense to be quoted on the stock exchange,” says Alan Cherry, chairman of Countryside Properties.

A major problem for volume housebuilders enticed by mixed-use schemes is that they are dependent on a business model that relies on quick returns to bankroll the next project. They find long-term developments difficult to justify to their shareholders. St George walked away from its £2bn King’s Cross joint venture because it could not justify to the market its involvement in such a large and risky scheme.

Changes

However, St George’s joint venture partner Argent, a large commercial developer, has the balance sheet to take it on. The company has had to move with the times – when Sir Stuart Lipton & Godfrey Bradman first envisaged the first ill-fated scheme for King’s Cross back in the eighties, it was to be a giant office park. Now there will be 550,000m2 of commercial and leisure space and nearly 2,000 new homes.

Argent chief executive Roger Madelin emphasises that the company never made a conscious decision to take on the housebuilders, but as well as 2,000 units at King’s Cross it is developing flats in central Manchester’s Piccadilly Gardens.

Stephen Robinson, a consultant in the planning team at agent GVA Grimley, points out: “A lot of the big commercial firms are looking at creating city quarters.”

Robinson adds that it is not just traditional developers that are entering the market. Tesco and other supermarket chains are increasingly buying options on greenfield sites and submitting applications for mixed-use schemes. Just last month Tesco suffered a setback when it was forced to withdraw its plan for a residential tower in the unlovely south-west London suburb of Tolworth, but it still insists that it will extend its success in the grocery field into housing development.

But commercial developers remain the biggest threat, as a quick look at the capital’s major residential development sites, as identified by London mayor Ken Livingstone, shows. They are dominated by developers that cut their teeth in the commercial world: the land surrounding Wembley and the Millennium Dome are both being developed by Quintain, which is also turning Middlehaven in Middlesbrough into a showpiece mixed-use development.

Similarly, Bovis Lend Lease has won £5bn of work at the Stratford City site in east London, which includes the Olympic village for the 2012 games. This follows Lend Lease’s acquisition of housebuilder Crosby Homes – a clear signal of intent – and the establishment of First Base, a residential joint venture in which it is the largest shareholder.

One of the drivers for this new interest is the planning system. Livingstone has forced commercial developers to provide housing when putting together major commercial developments. Central government policies are also geared to providing residences in areas that would have once been earmarked just for offices.

Commercial developers will still bring in expert housebuilders in joint ventures if they have the bottle to stick in there for the long term – Land Securities and Countryside are working together on a 600-home scheme at Ebbsfleet. But predictions that housing returns will outstrip those from offices mean that commercial developers are encouraged to forge their own way. The move towards high-density housing can only encourage them further, as the basic structure of these buildings could fit several uses, meaning that housebuilding experience is less vital.

At the same time, the government has been calling for a wider spectrum of bodies to get involved in housing provision. Housing minister Yvette Cooper wants greater competition for sites and housing associations have been among those that have responded. The Places for People Group, which has enormous balance sheet strength thanks to the 60,000 homes it owns and manages, has just outbid private housebuilders for a prime English Partnerships-owned site in Milton Keynes.

As not-for-profit bodies, these associations can offer a higher cash receipt for sites.

The future

Chris Brown, chief executive of Igloo Regeneration, envisages a two-tier market opening up, with the housebuilders providing cheap housing whereas mixed-use developers do the high value dwellings.

However, some housebuilders are willing to take the fight to their new rivals. David Pretty, former chief executive of Barratt, says: “Most housebuilders welcome competition; they’re not frightened.”

He could point to the example of his successor at Barratt, Mark Clare. He is in the middle of a £2.2bn takeover of Wilson Bowden, and one of the stated reasons was that he wanted the company’s commercial development expertise. This will help the country’s biggest housebuilder take on the commercial developers, but to prove this is the intent, perhaps Clare should also consider finding some time in his diary for a trip to Cannes next spring.