Barriers to expansion need to be removed to boost UK house building

Private house builders in the UK could potentially start building 150,000 new homes in England by 2020 if barriers to expansion like finance are removed, new research shows.

Private house builders currently build the majority of new homes in the country and the largest have the capacity to increase output through measured and planned expansion, according to the analysis from real estate firm Savills.

The operating margins of major house builders are only just returning to their target, the report says and suggests that better finance availability would allow the medium sized, often regional, house builders to expand.

But smaller house builders are not expected to recover back to their former levels but will be able to expand output via niche opportunities and through custom and self build.

The data from the report shows that private house building levels have been increasing over the last six years since the economic downturn. Not only are house builders increasing their output to meet demand, they built approximately 45% of all new affordable homes last year.

The majority of new homes, 54%, are being built by the 11 largest house builders, that is those building over 2,000 homes a year, and levels of starts have recovered to 20% below their 2007 peak. One third of new homes are being built by medium sized house builders, those who complete 100 to 2,000 homes a year, who are back to the levels of building in 2007.

The group that has struggled the most since the downturn are smaller house builders. Although some have expanded to produce more than 100 homes per year to become medium sized, others have stopped registering new homes altogether contributing to a 10% decline in registered house builders in 2014 compared to 2013.

The report explains that the government’s Help to Buy Equity Loan and NewBuy schemes supported 30,146 sales of new homes in England in the year to March 2015 and among many of the largest house builders an average of 32% of sales are supported by Help to Buy.

‘We estimate Help to Buy will support 30,000 new home sales per year and our estimate of potential delivery of homes by the private sector up to 2020 relies on its continuation. If Help to Buy comes to an end after its current funding expires in 2020, we are likely to see start volumes tapering off up to two years before the end of the scheme in anticipation,’ the report says.

It points out that access to funding is easing for SME house builders and competition among lenders means that the range of choice continues to grow. According to SPF Private Clients, a financial services broker, there are currently 45 different borrowing options available to SME builders. This is in sharp contrast to the very restricted market following the downturn.

Big banks which previously preferred to focus on major house builders are now prepared to advance in the region of 60% of the cost of a project to smaller players. Finance for up to 75% of a project is now available from about 20 specialist development lenders while debt funds, which are prepared to advance the full cost of a project, are increasingly looking beyond the M25 and further afield.

Providing returns to their shareholders is a priority for the nine listed house builders. Their operating margins are returning to their target of 15 to 20% over the cycle, having been increasing from negative levels since 2008. Typically, their strategy is to deliver controlled growth in housing numbers while maintaining or expanding their margins.

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Source: Property News Spain