Philip Barnes – Blog


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COMPETITION AND CONSOLIDATION

Lost count of the numbers of times the development sector has provided cast-iron (IMHO) evidence to prove housebuilders do not landbank.

But rather than feel satisfied that the issue seems to be going away the anti-builder brigade seem to just come up with more and more unfounded alternative facts about (a) cartel pricing or (b) gobbling up of smaller competitors.

Cartel pricing

Ref (a) nothing could be further than the truth from my perspective. What I see day in day out is fierce competition amongst large builders to secure land. Based on taking a commercial (and risky) view of the selling prices in the market.  Whatever anyone thinks about house prices (and affordability), they set the price of land.  There is nothing in this week’s house price data which reduces our risks in this regard.

And when we start building and selling, housebuilders act as price takers rather than price setters given that our main competition is the second hand market which comprises c90% of transactions. Housebuilding is a highly speculative and competitive environment and when the market is strong, as now, it drives strong profit performance. In contrast when the economy is weak we get hit first, hardest and for the longest.  We couldn’t pay our shareholders a dividend all the way from 2009 to 2013.  We are trying to manage the risks posed by a potential future downturn.  We sense it will come sometime but just don’t know when.

The idea that big housebuilders somehow act in cahoots in regards to either land prices or unit selling prices lacks any evidence (or logic) and will easily be dispelled by a conversation with any landowner, land promoter or land agent. Such a conversation may yield better insights than relying upon Twitter.

Consolidation

In relation to the consolidation of the industry it is perhaps worth making three points.

Firstly the big builders would be happy to see more smaller builders setting up and being successful and have made this point countless times. Smaller builders operate differently, often with lower operating costs but higher materials costs, and produce a different product. They generally compete more with the local second hand market than with us. They generate transactions and train people which is positive to everyone else in the sector.

A small development of 10 or 20 new homes in a town or village, if successful and well received, can often make it easier for the volume builders to follow on with a larger scheme with more affordable housing.

Secondly I would bow to John Tutte, CEO of Redrow in a recent interview HERE where he makes the point that the recent Redrow acquisition of Radleigh Homes will lead to greater housing delivery not less. Redrow will drive far more units out of the Radleigh operation than Radleigh themselves would have done. When builders acquire other builders it is usually to help drive up volume not to squash it.

And thirdly lets remember this isn’t a housing thing. Look at the consolidation in the car making sector, from over 500 British car makers down to 35, mainly very small niche operations plus a handful of global businesses. And the British high street – now dominated by a few big brands rather than the previous mix of nationals and locals. And try getting a coffee in many places if you don’t like Costa, Nero, or Starbucks.

I don’t recall a Coffee White Paper promoting financial and planning measures to support and develop more local cafes to break a mythical cartel. Albeit I would fully support such a proposal!

So in summary lets remember (and address) the real causes of the lack of diversity in the housing sector. Namely:

  • the ridiculously high entry costs and risks caused by the planning system
  • the lack of bank lending since the global financial crisis.

There are plenty of small sites around – the task is now to help the smaller operators gain access to them.  That starts with positively identifying them in a plan or other planning document and then providing low cost risk-free market access based on planning certainty.


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NEW CIVIC HOUSEBUILDING

At Barratt we were pleased to be invited to give a housebuilder response to the launch of Shelter’s recent report on New Civic Housebuilding (NCH). Albeit that upon arrival it didn’t feel like a particularly housebuilder friendly atmosphere. Flicking through the report I could understand why. The headlines in the executive summary were that speculative housebuilding reduces community benefits, doesn’t make homes more affordable, doesn’t build enough homes and squeezes out SME developers.

Luckily Toby Lloyd, who co-wrote the report and gave an excellent presentation on the contents, quickly confirmed that the report makes no criticisms of housebuilders, simply the economic model they work within. Indeed, it was accepted that housebuilders behave rationally given the circumstances we face.

The presentation was persuasive. Essentially NCH would create a new and additional supply of homes whereby land would be purchased by a state owned, “development corporation with powers” at a low land price. The corporation would then grant planning permission to local authorities to build large numbers of high quality new homes with local community support.  Indeed it was particularly good to see our development at Derwenthorpe in York, a partnership with the Joseph Rowntree Housing Trust, highlighted as an exemplar example of NCH.

What’s not to like?

Nothing. Cheap land, abundant planning consents and fast paced delivery of more homes. However, as Barratt is the largest purchaser of residential land and builds more homes than anybody else, I immediately felt drawn to the details and the practicalities.

And a few questions emerged.

Firstly, the notion of cheap land prices? Barratt invests over £1bn on land each year and our experience is that most landowners tend to prefer high land prices rather than low ones. Of course the State can use its powers to buy land, without landowner consent, but a land valuation precedes such an acquisition.

The valuation process is pretty straightforward. As per regulations and case law, the State identifies what the land is to be used for. If the future use is housing then the land is valued as such. Housing is a high value land use, irrespective of whether the landowner wishes to sell and this inevitably poses a challenge to the New Civic Housebuilding Model.

Notions of large scale land assembly at agricultural land value seem unlikely to work  by virtue of the legal position and landowner aspirations. The only way to address this would be if the Government embraced the difficulties of introducing a development land tax or changed the compulsory purchase regulations. On this point Barratt sees little prospect of this. Indeed we perhaps share the view of the Centre for Progressive Capitalism who recently described land value taxation as a ‘theoretical silver bullet, which the UK is not currently set up to implement even if it were politically feasible’.  In this context Barratt will continue to try and drive up the building of new homes given the circumstances we face. In this regard we have increased output by 55% over the last 5 years.

Secondly the notion of a “development corporation with powers” captured the attention. Again the Barratt experience is that localism is now embedded within the UK planning system and many local communities are keen to exercise the power and influence they now have. It is often within the areas of greatest housing need where residents feel most empowered.

It seems counter intuitive to think that the new housing estates that have been successfully resisted by local residents will become acceptable to them if promoted for public housing by the new “development corporation with powers”. One thing is clear. Giving local communities powers via localism is likely to prove far easier than taking those powers away via a new development corporation.

And finally we noted that the presentation made no reference to the skills shortages that NCH will need to overcome. Barratt is in a constant battle to secure the skills and resources both internally and within our supply chain, to support our growth aspirations.  NCH will obviously face similar challenges.

So the New Civic Housebuilding idea is undoubtedly alluring. However, from a housebuilder’s  perspective, when it is tested against some of  the practical planning, legal and market difficulties of building more homes it raises significant questions which need further analysis.

In this regard it is not unusual. A similar path was trod by Tim Leunig’s Community Land Auctions idea, albeit coming from a very different starting position. Even the plan-led system, 27 years after introduction, has not driven up housing delivery despite the unshakeable belief from most practitioners that it will.

At Barratt we hope that the new Housing White Paper survives the election in tact, whoever wins. We we feel it is a positive robust document which should help us and others to increase housing delivery. And despite the criticisms of the speculative housing model Barratt will continue to remind people that in 2016 we built over 17,000 homes (of which over 3000 were affordable), we supported 56,000 jobs, contributed £674m in tax, gave work to 13,000 UK businesses and created 4,382 new school places.