After the blind panic of 2008 and the restrained optimism of 2009, housebuilders have begun to think about the way forward
Six months ago, housebuilders were like drowning men, able to see nothing but the next wave breaking over their heads. Executives inflated their life jackets and entered survival mode. Very few had the time or the stomach to wonder what the industry would be like when the crisis was over.
Then, as some of the big players refinanced this spring, a sense of relief spread through the show homes and the stock market.
But with this elation came the apprehensive enquiry:
The only thing that seems certain is that the housebuilders’ business model will not revert to life as it was lived before the run on Northern Rock in September 2007; that relied on firms borrowing vast sums to buy land, and each other. But some alternative futures are beginning to come dimly into view.
The contracting model
This week Sir Bob Kerslake took the opportunity to propose one such alternative. The chief executive of the Homes and Communities Agency (HCA) told the Chartered Institute of Housing in Harrogate that housebuilders should form closer relationships with registered social landlords, and that more contractors should enter the housebuilding fray.
This is part of an HCA plan to boost production by working with as many delivery partners as possible. The hope is that, in exchange for land, they will be willing to share the sales risk and build in spite of the weakness of the market.
Kevin Cammack, an analyst at Cenkos Securities, says housebuilders cannot afford to ignore Kerslake’s overtures, despite the lower margin his model brings. He says: “They need to respond to the HCA and the quasi-contracting model it is proposing. Social housing isn’t the grief it once was and there are a lot of schemes out there that wouldn’t have even gone ahead without it.”
With margins of about 6%, rather than the 20% reached at the height of the boom, the HCA model has its limits. Alistair Leitch, finance director at Bellway, says: “We certainly haven’t sat down and thought about morphing into a contractor.”
He adds that housebuilders have to accept that they are in a cyclical industry. “There are a multitude of ways to reduce risk and cut costs, but you should be doing those during the boom times, too. We know booms won’t last forever and that’s why we got out of city-centre apartments in 2003 and 2004.”
The need for speed
We certainly haven’t sat down and thought about morphing into a contractor
Alistair Leitch, Bellway
Robin Hardy, an analyst at KBC Peel Hunt, is pessimistic about the prospects for recovery. He says housebuilders may need to make more radical changes. “Just because a model is tried and tested doesn’t mean it’s safe. That was the argument used by the US automotive industry.”
He believes the housebuilding industry will need to more fully embrace technology such as off-site manufacturing to speed up build time. “Unless there’s a sharp rebound, the current model is not sustainable. Most housebuilders are not profitable and construction costs will only get higher as building regulations get tighter.”
A quicker build time, Hardy argues, could move the focus away from margins: “If you have £100m and churn it twice a year at a 10% margin, you make as much profit as turning it once at 20%.”
He also predicts that landbanks will decrease as builders become reluctant to tie up so much cash. The result, says Leslie Kent, an analyst with FinnCap, will be a “pile ’em high, sell ’em quick” way of doing business.
Hardy adds: “There’s no reason why you shouldn’t see Tesco or Virgin becoming housebuilders.”
The search for investment
Efficient use of capital will certainly be vital in a climate where banks are reluctant to part with their cash. Stephen Stone, chief executive of Crest Nicholson, says the slow churn of cash will be a particular problem for brownfield regeneration, where remediation work can mean it is three years before housebuilders see a return.
He is encouraged by positive noises made by the HCA about brownfield development and the “forward cash cushion” its involvement would bring, but believes housebuilders will also need to attract private investors.
He says: “The big unknown is whether we can get pension funds into residential. We’ve never had to in the past, but there is a need now and they can take a 40-60-year view on their investment.”
Richard Kelly, construction partner at accountant BDO Stoy Hayward, points to the German model as a possible way of avoiding the feast/famine pattern. He says: “With a long-term investor on board who is not just looking to make a quick buck, companies can play the cycle more easily.”
Although housebuilders feel there are slim pickings out there, in recent weeks there have been signs investors are getting ready to swoop. This week a company called Landbank became the latest to join the fray, with a plan to raise up to £250m to spend on distressed land assets.
John Messenger, an analyst at RBS, says such funds are less likely to be tempted by a future dominated by low-density, low return future. As the demand for flats dries up, many housebuilders have publicly stated they are planning to build more traditional housing.
The big unknown is whether we can get pension funds into residential development
Stephen Stone, Crest Nicholson
So, will the industry learn from the mistakes it made while over-borrowing during the boom? Kelly believes some may, whereas others will still have the appetite for risk. He says: “You can’t take risk out of the equation. If you believe there is a good opportunity to buy land, develop it and make £1m, it’s obvious what you’re going to do, isn’t it?”
The voice of experience
Tony Pidgley, the Berkeley Group chief executive, is going through his third recession. He is renowned for correctly predicting the 1990 crash, and in March he called the bottom of the current downturn. He runs the only volume housebuilder with cash in the bank.
My view on what the industry should learn hasn’t changed; housebuilding is not a scalable model. It needs a phenomenal skills base to buy the land, deal with the complexity of the planning system and manage all the costs in the middle – you can’t write a computer program to do that.
Partnership is good but you need the right chemistry and culture. It also won’t necessarily make a contractor a decent housebuilder. Us housebuilders have come a long way and know what we’re doing by now.
I don’t believe that because you have a lot of money you can make money from distressed land. You’re not seeing the banks selling land cheaply like you did during the last recession. We are looking to buy ourselves, but we won’t pay idiot prices.
There’s always room to improve but technology in housebuilding has moved on apace in recent years. There is only so much you can do and buyers still like solid bricks and mortar.