It’s been a running theme of the construction sector that the political cycle is a fair distance behind the economic one.
Governments have time and again been frustrated to find that, by the time they diagnose the symptoms, the disease has either passed or become too severe to cure quickly.
This is how some have seen the housing sector, which is recovering from severe recession and has been the focus of the government’s recent growth initiatives.
New policies have been announced in response to the clamour from industry for action, as the merits of housebuilding as an ailment for the wider economic malaise are touted.
The latest in the barrage of initiatives coming out of Westminster is deputy prime minister Nick Clegg’s suggestion that pension funds be used to back up the deposits of family members – a move which may help sidestep capital requirements in the age of austerity.
The sector has endured some tough times but growth is returning for many firms. In the string of results released in the past month, the major housebuilders have reported encouraging signs.
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Barratt’s CEO, for example, has told CN he hopes to double the firm’s operating margin, clear its debt, pay out its first dividend since 2008 and boost its completions rate in the coming years.
Kier’s chief executive Paul Sheffield, meanwhile, said he wanted to double the housebuilding arm’s profits to reach a third of the company’s total, while Cala’s CEO said the firm was expecting further profit and turnover growth, on the back of a landbank comprising 9,600 plots.
Several firms have spent years retrenching away from volume and towards profit, buying up promising plots and building larger, family-orientated units with larger margins.
Even so, one of the main challenges for firms like Barratt and Taylor Wimpey is getting through the old stock which has been holding back profits.
As Redrow CEO John Tutte told CN: “We haven’t been looking to increase volumes; we’ve been looking to change product mix to family housing – there’s been a huge switch from apartments to housing.”
Galliford Try is among several companies focusing more on housebuilding, having completed a three-year strategy to double housing completions to 3,000.
The firm is now boosting housing as construction comes under pressure, while its focus on regeneration is good for its whole business.
Profits and output in Galliford Try’s housebuilding division, Linden Homes, doubled in the last year, while group MD Ken Gillespie told CN the firm was getting “ready to grow again”.
Mr Gillespie warned that across its construction activities the firm was in no rush to increase output levels and risk becoming what he called “busy fools”.
“In construction it’s really about protecting margin and protecting cash in what remains a very challenging market,” he said.
But every silver lining has a cloud. While the big builders are primed for growth, the numbers of SME housebuilders, who have helped build Britain out of recession in the past, have dropped dramatically. Their numbers risk falling as low as half what they were in the 1980s.
Into the void
There is a big question mark over who will step into the housebuilding void while the big players are seeing profits rise.
Berkeley, Persimmon and Taylor Wimpey have announced plans to release capital to shareholders, returning dividends rather than chasing volume.
Housebuilding is at record lows. The country continues to need an estimated 230,000 homes a year to meet demand, but according to the Department of Communities and Local Government annual housing starts reached 98,250 in the 12 months to December 2011: down by 4 per cent on the previous year.
At the peak of the housing boom around 2007, Taylor Wimpey was building 21,000 homes a year while Persimmon completed 26,000.
Both companies are planning to release billions of capital to shareholders, stressing that they are focusing on margin, not chasing volume.
When the upturn comes there will be an opportunity for SME housebuilders, but at the moment it’s difficult to see how SMEs can re-enter the market now that the big beasts have taken a tighter hold, particularly in the super-prime South-east.
The major issues remain mortgage availability and liquidity of the finance market for consumers, while for smaller firms credit is hard to come by without being able to take advantage of economies of scale or draw upon other arms of the business.
Galliford Try, for example, is holding on to a 10,500-plot landbank, 82 per cent of which is newer land acquired after the crash at relatively low prices.
Clearly, this is the kind of recession-busting strategy that is not open to a smaller, local housebuilder.
Volumes may be low and times may still be challenging, but for the big players who can afford to ride out the cycle and turn market conditions to their advantage, there is great opportunity ahead.
Galliford Try is the contractor taking the headlines for its successful expansive housing strategy, but other contractors are also growing their presence in the sector.
Companies such as Morgan Sindall, Lend Lease, Galliford Try and Kier are seeing opportunity in partnerships with local authorities, which offer opportunities both in terms of regeneration and affordable housing targets, while contractors such as Wates and Willmott Dixon are active in the repairs and maintenance arena.
Skanska is taking a different approach to housing, according to Magnus Andersson, president of Skanska Residential Development UK, as it looks to offer high-end, sustainable homes, primarily in the London commuter belt.
It remains to be seen how far the government’s initiatives on loosening planning rules and guaranteeing some development will address the fundamental problem: the lack of finance.
Mortgage-boosting schemes like Funding for Lending, FirstBuy and NewBuy are welcomed, but the government can only do so much when its hands are tied by banks that are unwilling to lend.
In any case, a government as desperate for growth as this one is bound to focus on high-profile, headline-grabbing initiatives that generate output, employment and positive headlines. It may not be overly concerned with who is building, so long as somebody is.
The question that must be asked, then, is where does that leave the little guy?