The Future of Housebuilding

Gordon Robinson – United Trust Bank

With little more than a month to go before the General Election, the Home Builder’s Federation (HBF) policy conference was an excellent opportunity for representatives from the three main political parties to stand before many industry stakeholders and outline their plans for housing should they get the keys to Number 10 on May 7th. Of course, some have a greater chance of that than others, but the Lib Dems could still have influence if they are called upon to be a coalition partner again. All of the main parties have since revealed further plans for housing in their manifestos, including a new lease of life for ‘Right to Buy’ from the Conservatives, but this is what they had on the table in March.

As well as speeches from the politicians, there were presentations from the HBF themselves, building consultants Nathaniel Lichfield and Partners, investment bank Moelis & Co, the Homes and Communities Agency (HCA) and the Construction Industry Training Board (CITB). What follows are few of my chosen highlights.

Stewart Basely, Executive Chairman of the HBF, kicked off proceedings with some good news. In their view the housing industry has had a much improved last 18 months. There were 137,010 new home starts in 2014, which is 59% more than in 2009 when the numbers hit rock bottom, and around 100,000 additional people have been employed in the industry in the last two years. The HBF believe this is down to the general economic recovery and a return of consumer confidence, the Help to Buy scheme and the National Planning Policy Framework which has helped to increase new permissions by 69% over the last two years to a current level of 200,000 a year. However, there’s still plenty more to do. We need to build a lot more homes, we need to build the right kinds of homes and we need more affordable homes. Interestingly the HBF are just as concerned about the lack of specialist homes for the retired and elderly as they are opportunities for younger consumers to get on the property ladder.

The HBF’s requests for whoever sits in Number 10 come May 8th are for the Government to adopt a long term strategy. They want Help to Buy to remain and to start thinking about what comes next. They want to sustain the increase in new building land coming through the planning system and make the process more business friendly. They want more assistance for SME builders and support from the government to ensure that there are sufficient skilled workers to meet future capacity. All of these requests seem very reasonable and sensible.

First up from the political parties was Lib Dem Communities minister, Stephen Williams MP. Stephen restated his party’s target to build 300,000 new homes a year on the basis that we need something really ambitious to make up for the lack of supply and the demographic changes we’ve experienced in recent years. I admire ambition, but it’s fair to say that the ‘aim for the stars and you might just hit the moon’ approach was met with some scepticism. Where the additional land, materials, labour, finance and, of course, planning permissions were to come from to almost double the output, was not clear. It was acknowledged though that the increase would be largely led by the private sector.

To be fair to Stephen, at the conference there wasn’t a huge amount of substance behind the rhetoric from Conservative Housing Minister Brandon Lewis or Shadow Minister Emma Reynolds either. However, both the Conservatives and Labour have fleshed out their plans for housing a little more since the HBF event. The Conservatives are proposing to continue what they’ve started in trying to free-up the planning process, encouraging investment in housing and infrastructure and generally supporting home ownership. Their new initiative is the Help to Buy ISA which promises to hand up to £3,000 to an aspiring first time buyer (£50 for every £200 saved) if they save a maximum of £12,000 in the tax free account and use it for a deposit on a house. Critics pointed out that whilst it might be a vote winner for aspiring young homeowners it does little to increase the volume of new home building.

In their slot Labour accused the coalition of not really having a plan despite the various initiatives they’ve presided over during their term in office. Labour would look to follow many of the recommendations for planning system reform contained in the Lyons Review. Since then however, Labour have announced that they would use the money saved in the new Help to Buy ISAs, an estimated £5bn, to create a ‘future homes fund’. Savings institutions which offer the new ISAs would be obliged to invest the money in housebuilding. The Government would underwrite the investment but Labour say that the additional funding could enable an extra 125,000 homes to be built by 2020 and that their extension to George Osborne’s initiative will actually help to increase the supply of new homes rather than just create demand for them. None of the three politicians put forward any ideas for tackling the major issues in delivering a significant increase in output in a short space of time. The two big ones being ‘who’s going to build them?’ and ‘what are we going to build them with?’

The HBF’s Economic Director, John Stewart (who by the way is a regular contributor to our own Update magazine) showed a slide comparing the constraints on new home supply as seen by UK housebuilders in 2014 compared to 2012. Planning problems and delays were still the biggest factor, however by far the greatest shift in negative impact has been the price and availability of labour and materials. Those of us involved in the construction industry are well aware that there’s a shortage of skilled workers and that even very basic building materials, like bricks for example, can take several months to supply. Greater demand + under supply = increasing prices for labour and materials and this must be reflected in asking prices. This will put yet more pressure on the necessity to provide homes at realistic and affordable prices.

I don’t think there is a magic wand solution to these problems and we shouldn’t waste time trying to find one. The home building industry, and all the sectors which support it, are performing well but they are still recovering from the effects of the recession. Manufacturers downscaled as demand for materials fell and they have not been able to ‘tool-up’ again quickly enough. Tradesmen were laid off and companies reduced their apprenticeships and, as a result, it’s going to take time to rebuild a skilled workforce. It was also acknowledged that part of the solution would almost certainly come from employing skilled workers from Eastern Europe. However, the supply chain will continue to recover organically and the workforce can grow and that can be helped by having a stable economy so that companies feel able to invest for the long term without having their growth plans constrained by nervousness over when the next bust may be. It’s possible that Labour’s proposed ‘future homes fund’ might help to create at least some surety for the next five years at least.

What was clear from Nathaniel Lichfield director Matthew Spry’s presentation is that the new homes industry makes a huge contribution to the UK economy. He suggested that the industry is currently responsible for £19.2bn of economic output and more than 600,000 jobs. £5.5bn is spent on industry suppliers of which 90% stays in the UK, adding to economic activity at home. Increasing new builds by 100,000 a year would give the country a £13.6bn boost in economic output and create/require an additional 430,000 jobs. It would also contribute an extra £1.2bn to the tax man. With numbers like that on the table, new home building is bound to remain high up on the political agenda.

The view from the City, delivered by Mark Aedy of Moelis and Co, is broadly positive. Publicly quoted housebuilders have seen their values increase way in excess of the UK PLC benchmark. Between October 2008 and October 2014, the equity value of UK housebuilders had increased by an average of 427% compared to the 72% growth of the FTSE All Share Index. In short, although they acknowledge some potential challenges (possible market overheating/prospect of rising interest rates/increasing land values in London and the SE) investors currently find housebuilders attractive and there’s considerable optimism for the future.

What does all of this mean for specialist development finance lenders like United Trust Bank? Although the majority of new homes are and will continue to be delivered by the volume builders such as Barratts, Bovis and Taylor Wimpey for example, there’s still a significant role for SME housebuilders. In fact, the Lyons Review indicated the SME building sector could increase output by 80% as a contribution towards the overall target of increasing new home completions to 200,000 a year by 2020.

As we know, SME housebuilders and developers are still being largely under served by the High Street banks when it comes to providing the funding for their projects. SME’s cannot increase their output without a financial backer, and that’s where we come in. Volume builders have access to the resources required to acquire and build out large developments. But for the many more SME housebuilders, their bread and butter comes from the smaller developments which the High Street banks are often more reluctant to fund, either because they lack the skills at a local level to understand the proposal or they generally don’t have an appetite for development finance. It’s our knowledge and expertise, together with a willingness to create bespoke funding packages that enable smaller developers and housebuilders to take on a variety of projects. There will be plenty of opportunities for SME builders to contribute to the push for more new homes over the coming years and United Trust Bank will be right beside them, providing the support they need.

In conclusion, the housebuilding industry appears to be in good health and making strong headway in increasing the number of new home completions. Government support by way of the Help to Buy scheme has contributed to the recovery but more than anything increased activity has been prompted by a general upturn in consumer confidence. More, however, needs to be done to tackle some of the bureaucracy and NIMBY’ism of the planning system and this is where bold government could have its greatest impact. By removing unnecessary obstacles to permissions, housebuilders and developers could devote more time and resources to actually building homes than battling it out with planning committees and Parish councils.