What will the housebuilding market look like in 2 years time?
Tuesday, June 7th, 2011Predicting the future in any industry is a precarious business, in housebuilding it is almost impossible. The past ten years have seen huge amounts of volatility. Since 2008, anybody involved in housebuilding has been pre-occupied with the credit crunch so it is easy to forget the mergers and acquisitions that preceded. For those who worked for Westbury, Beazer, Wilcon, Alfred McAlpine and many others the pre-recession years were full of job insecurity despite the prevailing market conditions. For those that were on the wrong end of redundancy several times before 2008, the recession was the final straw. Having found gainful employment in other sectors they will never return to housebuilding.
The three and a half years that have defined the recession have, unsurprisingly, put a halt on acquisitions. Banks have been licking their wounds and repairing their battered balance sheets so loans for acquisition have been hard to come by. For those builders who were highly geared pre recession the last few years have involved constant dialogue with banks to restructure debt, avoid breaching covenants and generally staying solvent. However, as the new homes market shows early signs of stability the odd rumour of who might be buying who is beginning to resurface. Further consolidation of housebuilding companies seems likely as the institutional investors like to see clear market leaders enjoying substantial market share and benefitting from economies of scale.
The mortgage market is showing signs of easing with an increasing number of 95% LTV products becoming available. This should re-open home ownership to the first time buyer which in turn allows increased movement further up the chain and will put an upward pressure on house prices as buyers begin to compete for individual properties. The next two years is likely to see the mortgage market find it’s balance point between managing credit risk and profitability. It is worth bearing in mind that default rates in the UK never grew beyond 1% even at the peak of lending which suggests that there is plenty of head room for high LTV products at sensible rates.
All of the largest UK housebuilders closed offices during the recession, particularly where they had multiple offices in one geographical region. This was all part of the rationalisation of capacity to enable them to make profit at half of the 2007 production volumes. However, if the mortgage market does encourage the first time buyer back to the market housebuilders will have two growth options to fulfill demand. They can either grow organically by opening new offices (or re-open previously closed operations) or go down the acquisition route and purchase an established competitor in the target region. The former method will lead to recruitment of staff and may force the industry to be a little more open minded about where it sources it’s new employees. With fewer competitors to plunder for staff and many of those made redundant now lost to the industry forever, housebuilders will have to look at transferable skills from other sectors and improving their own training and personal development to make the most of these individuals.
