At the start of the year we carried a comment piece from David Pretty, the former Barratt chief executive, detailing two scenarios that housebuilders would have in place in the run-up to the spring selling season.
Plan A: tighten belt, motivate salesforce, slow down construction and apply caution when buying land. The alternative was Plan B: stamp on the brakes.
Sadly the turmoil in the financial markets has forced B on them, and since the new year our headlines have been dominated by offices closed, staff axed and developments postponed. And look at the statistics released this week: planning applications down 43% in March, margins heading south and the biggest fall in prices since 1992. Then there’s the death of the 100% mortgage. So, everything points to the market getting worse. Much of what happens next is outside housebuilders’ control. Fingers crossed for an interest rate cut – a decision was due yesterday, after we went to press. And let’s hope Sir James Crosby, the banker drafted in by Alistair Darling, finds ways to make money available to lenders quickly.
That said, full marks to Mark Clare, Barratt’s current chief executive, for building bridges with lenders. He is introducing measures to ensure that all incentives offered by housebuilders are disclosed to lenders to give them confidence that they are not lending more than the property is worth.
Housebuilders are in much better shape to ride a downturn than they were in 1992, when there were many more unsold houses. This time around, stock is much more limited, and there’s a good chance that some units can be sold to social landlords. Nobody really knows when the housing barometer will once again point to fair, but when it does, those with the most cash will be in the best shape to take advantage of the many tempting land deals on offer.
Nothing for good behaviour
The Scottish parliament, Wembley stadium, Terminal 5 … a lot gets laid indiscriminately at construction’s door. Now we can add prison overcrowding to the list. As we reported a few weeks ago, the Ministry of Justice is on a mission to get 20,000 prison places built within six years. Great news in that it is looking to spend £2.3bn; bad news in that political pressure is clouding its judgment. It is revising contracts for its framework to make contractors pay through the nose for late delivery. The exact level of penalties is still under negotiation, but the principle is that it costs £350 to put a prisoner up in a police cell overnight. Multiply that by 300, and bang goes any profit. Damages are nothing new, of course, but these are, well, punitive, especially as there’s no balancing reward for success. Nobody gets rich building prisons, so if the ministry wants to increase risk, it will need to increase the incentive, or it may find itself paying nasally to fill its tender lists.
Denise Chevin, editor