The housebuilding industry that emerges from this recession will bear little resemblance to the one that grew out of the nineties slump
Britain’s housebuilders are unquestionably experiencing their worst recession in post-war history. Some commentators point to nascent signs of recovery, perhaps enough to bring cheer to the spring selling season, but there are many more reasons to remain cautious. After all, many swallows were sighted in the US over the past two years, yet the housing industry remains on its knees – and arguably we are running 12-18 months behind their cycle.
Before recovery takes hold, the UK’s 10 largest housebuilders could be forced to write off more than £5bn from balance sheets, slash their workforces and, with the exception of Berkeley, renegotiate banking arrangements. With these processes being played out, it is time to pose the question, what type of industry will emerge from all this?
A good starting point is to recall what happened after the recession in the early nineties. My recollection is of two principal structural changes. First, land investment policy changed quite markedly, albeit in response to the introduction of the 1994 Town and Country Planning Act. This heralded the dawn of the strategic land bank, and land investment consumed much of the cash that had been raised to refinance the industry in 1993-95. Such a demand on cash is unlikely this time around, however, as land is a plentiful commodity on housebuilders’ balance sheets at the moment.
Second, the recovery ultimately led to a significant round of consolidation after 1997, based primarily on the strong taking the weak, driven by the desire to acquire land banks. Again, it is quite difficult to see this happening this time. Why? Well there is less to consolidate for starters, land banks are long enough and the recession has shattered the “economies of scale” god, worshipped slavishly over the previous up-cycle.
Given that government now has a centrally set target for volume delivery, would it not make some sense to own or control the missing piece in the jigsaw?
So how might things be different this time around? The type of industry I think possible is in essence a three-category structure:
- One or two large volume housebuilders, with outputs of 10-15,000 units a year being nationalised or at least substantially owned by the government or quasi-government. Consider for example the consequences of a debt-for-equity swap for either Taylor Wimpey or Barratt. This could easily lead to effective nationalisation, given that substantial loan providers are already part-nationalised banks.
The concept is not so outlandish, really. After all, the government already has strong control of most processes in housebuilding, short of its physical delivery: the largest proportion of land is state-owned, the planning process itself is determined by various levels of government, it heavily influences design through such bodies as Cabe, it sets strategic planning policy and now has a discreet influence over mortgage supply. Given that government now has a centrally set target for volume delivery, would it not make some sense to own or control the missing piece in the jigsaw?
- The above would still leave room for four or five medium-to-large housebuilders (capable of 5-10,000 units each) to thrive in the private sector. These ideally would need strong financial resources, national presence and an ability to provide the full product range albeit with less focus on social housing schemes outside section 106 requirements. The likes of Persimmon and Bellway might typify this breed
- Finally I would see a proliferation of smaller players building fewer than 3,000 units. This group, perhaps downsized versions of existing housebuilders, will become much more localised and market driven, with the emphasis on design and location.
In short, the consequence of the last recession was a move to scale and uniformity, but once the fires have burned out, this time I see a much more delineated industry with clearer market segmentation and operating strategies. Indeed, a structure from which the homebuyer should benefit.
Kevin Cammack is an analyst at Singer Capital Markets