Philip Barnes – Blog

HOUSEBUILDER OLIGARCHS

3 Comments

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.

 

Author: philipbarnesblog

Group Land and Planning Director for Barratt Developments PLC. FRTPI, FRICS

3 thoughts on “HOUSEBUILDER OLIGARCHS

  1. Fair points. Keep being bold, the message needs reinforcing. Best wishes. Seona

  2. Well said. I believe the root cause is LPA’s being so reluctant to issue consent due to overwhelming & unreasonable objections from NIMBY locals. Many concerns are unsustainable, yet the myths rule over. Backlogs in PiNs don’t help. With crisis now headlines (and understood as a growing concern by many for years) it is well overdue to refresh the image of supporting new homes. It is (or should be) a positive thing to bring prosperity and new youthful families to a rural location. Home Counties worst offenders!

  3. Another intelligent and helpful blog from Philip Barnes.

    I don’t think that the fact that Barratts has increased its output from the dark days of the post-credit-crunch recession is necessarily evidence that volume housebuilders are not partially to blame for housing under-delivery, but it is good to see support for the position that CPRE has been taking for several years (most eloquently in our 2014 report “Increasing diversity in the house building sector” http://bit.ly/1MU1fN9). Without doubt, the volume housebuilders need the support of others, including smaller builders, housing associations and even the state, in order for us to build the homes we need.

    What I think does deserve attention is what needs to be done about small builders’ profit margins. Part of the problem (not all of it), it seems to me, is with the assessment that a £150,000 profit on a 2-house scheme isn’t feasible as a result (partly) of the planning risks – “the reality is that small speculative housebuilding projects are highly risky”. Well, the problem there is with the word “speculative”. Anything that is speculative is, by definition, risky. Would it be naive to suggest that small housebuilders (and indeed all housebuilders) should perhaps focus on building homes on sites that communities actually want to see built, rather than chancing their arm on random sites, especially while sites allocated in local and neighbourhood plans lie idle?

    What we really need is for the planning system to take away such risks for smaller builders by positively encouraging the identification of more and smaller development sites in local and neighbourhood plans. This could also be good for the social mix and fabric of villages and smaller towns, where a single large development can be politically unacceptable, but several smaller schemes may be welcomed (think of the recent experience with the Thame neighbourhood plan in Oxfordshire). One problem with this is that local planning authorities have for some time been discouraged from identifying small sites in their local plans (neighbourhood plans are a different matter) on the basis that such sites are less viable than big sites. The people who have most often made that case are (some) big housebuilders, for whom such sites are of course unviable, because they don’t fit their business model (and it is good to have a variety of business models, which includes the big ones alongside the little ones).

    It’s also difficult and costly for LPAs to identify small sites, so for many years they have relied on windfall sites or ‘small sites allowances’ in their local plans. The theory goes like this: you have a need for 5000 houses in the 20-year plan period, and you know that on average 25 homes are built on small sites every year, so over 20 years, that will be 500 homes, so you only need to find new sites for 4500 homes. Now, the problem is that the NPPF as currently worded sets a very high bar for councils to be allowed to use a windfall allowance – at the insistence of big housebuilders, who would rather that those 500 homes were built on their 1 big site, thanks very much. So the council allocates 5000 homes across its district and then, quite reasonably, takes a much less positive view of proposals for homes on small unallocated sites. Which makes such developments more risky for the small housebuilder.

    So, some of the reasons why we haven’t been building as many homes on small sites, and hence why we’ve lost a lot of our smaller housebuilding firms, are directly due to the tactics of some volume housebuilders. There have been other reasons too, including recession, and, of course, including shameless NIMBYism. But you can’t completely blame NIMBYism, because one of the things that this government is most proud of – arguably with some justification – is the introduction of neighbourhood plans. Neighbourhood plans are perfectly positioned to identify small sites for local small builders to build homes on, and if the government’s figures are to be believed, areas with neighbourhood plans deliver 10% more homes on average than areas without.

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