Philip Barnes – Blog


3 Comments

HOUSEBUILDER OLIGARCHS

One of the commonly cited reasons for new home delivery undershooting the level of need is the underperformance of the larger housebuilders. This is simply not the case. In Barratt our output in FY16 was 17,319, up 53% on just 4 years ago. We are doing our bit. Not just increasing volume but broadening the house types and locations. More smaller products for first time buyers and more towns where we haven’t built for a while.  Our S106 Agreements deliver more affordable homes than any other organisation in the UK.

The real problems are the limited number of organisations who actually build new homes and the limited number of extra sales outlets.

Regional Builders

So how can we broaden the supply base with more smaller builders and more output from housing associations? And what has been going wrong?

There is no doubt there are more regional builders out there looking for sites. Typically they are often relatively new companies, with say 10 – 20 staff.  They have secured development funding and are looking for sites of say 20 – 80 units. Generally looking for consented sites but, as they grow then looking for subject-to-planning deals with landowners. With more support from Government (expected in the Autumn Statement) it seems clear we will see more new regional firms and existing ones growing.

Small Builders

For the much smaller builders (firms of c3-10 people, plus a local supply chain of tradesmen) there is perhaps less optimism in terms of major inroads into the build-for-sale market. They currently tend to focus on focus on residential/commercial extensions or one-off ‘grand designs’ commissions from clients who have secured their own consents. There is usually not enough profit to offset the risks associated with buying sites, securing consent and selling homes, even if development funding could be secured.

The problem is a lack of supply of consented sites to these smaller builders.

There are no land promoters out there securing consents and selling them on to the small builders. How could there be? For two houses at £250k (above the UK average selling price) the consented land value may be c£200k. If a promoter gets a 20% that means £40k. Completely unviable given the costs and complexity of the UK land market and planning process.

So what if the small builder tried to secure the land then get the planning consent themself. Well again for 2 plots at £500k GDV, the maths might work out at c£200k for the build, £100k for the land and the unconsented planning costs at £50k leaving a profit of £150k. That sounds feasible until you consider the builder needs to carry planning risks and delay, staff costs during the whole process, interest charges on finance and, above all, the sales risks and costs. Whilst you can play around with the maths (and every deal is different) the reality is that small speculative housebuilding projects are highly risky.

The small builders will continue to act as contractors for ‘grand designs’ or part of the supply chain to regional builders. Both these sectors should increase their volume of the coming years but if the additionality is above 20,000 per year we will be doing really well.

Councils and Housing Associations

Others will comment better on the potential for LAs to get back in the game of building social housing. Two things are clear, lending conditions look better than they have done in a generation and trends point to increased demand for a decent rented product.

For housing associations it will all be about land supply and risk appetite. Securing land is competitive, risky and expensive. The potential to over-pay causing really painful future losses is massive. However, housing associations can bring huge commercial strengths to the process of volume delivery of both rented and for-sale products. In particular, a longer term funding model and very cheap lending secured against good assets.

These commercial attributes offer significant potential for major volume increases from the housing association sector. If there is willingness and trust on both sides, there is perhaps even greater potential for volume uplift through housing associations linking these attributes to the land, planning, sales and marketing skills within volume housebuilders.

Already, exciting innovative JVs are in play for example our JV with Places for People (PFP) at Brooklands in Milton Keynes. Delivering new homes at pace. PFP put in the land and infrastructure then we put in the build and sale. Simple profit share.

Maybe we will see more.