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Housebuilder confidence returns as heads turn to government options

Housing has been at the forefront of recovery but continuing challenges over supply coupled with political uncertainty pose question marks over sustained growth.

Pressure is mounting on the government to intervene in the housing market and increase supply now that housebuilder confidence is back in full swing.

New home registrations figures released by the National House Building Council for Q2 2014 showed a steady increase of 3 per cent on the same period last year.

*Countryside includes 2013 results for Millgate developments, which merged with Countryside
**Cala includes 2013 results for Banner Homes, now acquired by Cala

Total registrations for the quarter rose to 36,858 from 35,683 for Q2 2013.

The private sector made up the bulk of registrations with 27,527 - an increase of 9 per cent compared with the previous year’s 25,209, while public registrations dipped 11 per cent to 9,331 from 10,474 in Q2 2013.

Public pick-up predicted

NHBC business development director Neil Jefferson expects to see a recovery in public sector registrations in the coming years.

“Q1 2014 was very good for public sector registrations but Q2 has fallen away,” he says.

“It’ll take time for public sector registrations to come through but we would expect to see a recovery in that number”

NHBC, Neil Jefferson

“The reason for that, we believe, is because the Homes and Communities Agency Affordable Homes funding programme is tapering out now and the impact of 2015/18 allocation has yet to come.

“But we definitely expect to see this pick up. It’ll take time to come through but we expect to see a recovery in that number.”

Debate over government methods

EC Harris head of residential Mark Farmer says that now confidence is coming back to the housing market, recurring issues over how the government steps in to boost supply will come to the fore.

CN100 Average pre-tax profit margin housebuilders vs CN100

The answer lies in innovation, Mr Farmer says, adding that the role of public authorities will be one to watch in the delivery of more homes across the country over the next 12 months.

Structures in place such as local housing companies, which enable local authorities to set up a company and start their own development programme, have yet to be taken up in the mainstream, he explains.

“It would be interesting to see whether the government would try to help [these structures with] the ability to borrow against the housing revenue account and leverage spending that way – having revenue streams by which they can securitise lending.”

Housebuilding is set to rise to 167,000 new homes a year by 2018, according to recent research by Savills, with the private sector increasing production by 8 per cent a year over the next five years – a total increase of 35 per cent over this period.

This equates to an average output from housebuilders of 107,000 new homes annually over these years, which Savills says assumes support from government initiatives such as Help to Buy and finance easing for SME builders. 

Completion numbers edging back up

Housebuilding completions for Q1 2014 stood at 36,450, 11 per cent higher than the previous quarter.

In 2013, 109,370 home were completed in the 12 months to December – 5 per cent lower than the previous year.

Barratt, Taylor Wimpey and Persimmon hold onto their positions in this year’s top 20 housebuilders, taking first, second and third place respectively.

Morris and Kier Homes slip out of the table, replaced by Mount Anvil and Keepmoat Homes, which both reported sizeable profit increases in their latest results.

Pre-tax profits for Mount Anvil rose to £15.4 from £10.1m, while Keepmoat jumped to £15m from £9.1m.

This year saw the merging of Countryside Properties with luxury housebuilder Millgate Developments; the builder remains 11th in the rankings.

Cala Homes is close behind, jumping three places up the chart after acquiring Banner Homes earlier this year.

“If you’re going to build 250,000 houses a year you need to be granting 250,000 planning permissions a year.”

Cala Homes, Alan Brown

Cala Homes chief executive Alan Brown says the decision to buy Banner Homes has put the team on track to trebling the size of the business by 2016 – a year earlier than it had previously set out in March 2013.

But there are still challenges ahead. The company is working on ways to attract more talent in the industry and agrees that collaboration among housebuilders could help to solve this.

Planning revolution priority

Mr Brown says reform in the planning system should remain a top priority for the government moving forward. “This country has got a housing crisis,” he says.

“We need to be building in excess of 250,000 houses per year and, by definition, if you’re going to build 250,000 houses a year you need to be granting 250,000 planning permissions a year, and we’re not.”

CN100 Housebuilders turnover change

Planning permissions in the 12 months to the end of Q1 2014 totalled 177,731, according to the Home Builders Federation’s New Housing Pipeline report, in association with construction intelligence unit Glenigan.

This showed an increase on the number of permissions granted in the 12 months to the end of 2013, which stood at 174,471.

Mr Brown adds: “Until we get to the point where 250,000 planning permissions are being granted on a regular basis, this is something we need to keep reinforcing.”

One source at a major housebuilder sees public sector land supply as the “single biggest constraint” for the sector in the 12 months ahead.

“The point of the National Planning Policy Framework was to ensure every council has a five-year land supply with an up-to-date local plan and that is still a long way short.”

The source says central government needs to place more pressure on councils over land supply where they are failing to deliver homes, with local plans becoming part of how a local authority is assessed.

“If you compare this to problems around social infrastructure such as schools and hospitals, where councils are failing on delivery there is pressure from central government. But this same pressure is never applied to housing.”

Labour calls

Shadow housing minster Emma Reynolds says it is important for housing to be treated as infrastructure is in the UK.

She adds that she would like to see a connection between the work of Sir John Armitt’s independent infrastructure commission with Sir Michael Lyons and his review on housing policy – both commissioned by the Labour Party.

EC Harris’s Mr Farmer says integration of housing with wider infrastructure across the country is “critical” to the decisions he makes around the viability of strategic land.

“I see the quickest route to new delivery as locating developments on the edge of established areas where people want to live but where the associated cost of infrastructure is not prohibitive,” he says.

“You just can’t slam up thousands of units without thinking about all these things.

“You have to have sustainable communities; you need to be creating the whole piece, which is why some people think developing new towns in the short to medium term is too difficult.”

“Locating developments on the edge of established areas… is the quickest route to new delivery.”

EC Harris, Mark Farmer

Ms Reynolds, who earlier this year announced that a Labour government would build a new generation of garden cities and new towns, admits it is a long-term solution and that there “is no silver bullet” to solving the housing crisis.

All three political parties have signalled that housing will form one of the centrepieces of their manifestos in the run-up to the next general election; however, many in the housing industry predict a policy slow-down in the coming months.

CN100 Housebuilders best and worst profit margins

HBF executive chairman Stewart Baseley says there are uncertainties, too, over what the policy environment would be under a newly elected government.

He also highlights the need to help SME builders “play their part in increasing supply”, which the Labour and Conservative parties have started to address through their respective schemes, Help to Build and the Builders Finance Fund, to ease access to finance for smaller builders.

PRS: An opportunity for investors?

There is a wide range of opportunities for institutional investors to enter the housing market through the private rented sector, according to EC Harris head of residential Mark Farmer.

However, he says: “There is a stumbling block at the moment as to what their engagement model is.

“There is a chance that some will decide to be at the vanguard of this activity, but there’s a little inertia at the moment due to the cautious nature of life and pensions funds, with low-risk and lower-return models.”

Leaders in PRS to date include Essential Living backed by US investors M3 Capital; Fizzy Living, with cash from Abu Dhabi Investment; and Hub Residential, supported by M&G Real Estate.

Mark Allnutt, group commercial director at Thames Valley Housing, which owns and manages Fizzy Living, says the company is looking to increase investment into Fizzy Living and new-build development year on year.

“We want to bring in further debt funding alongside the equity commitment we have and rapidly build up a substantial portfolio,” he explains.

“The aim is to deliver 500 Fizzy units each year over the next few years.”

Mr Farmer expects to see activity pick up as firms such as Fizzy Living start to deliver and grow in size and investor confidence increases as a result.

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