Crisis management

Everything went wrong so quickly. Just over a year ago, after Labour boldly pledged to build 3 million homes by 2020, the future could not have looked brighter for the house building industry.

But that was before it fell victim to the credit crunch. The stark fact is that today private house builders are embarking on fewer new builds than at any time since records began. During August, the National House Building Council received just 3,720 applications to start building homes from the private sector - 76 per cent fewer than 12 months earlier.

And this was no blip. Starts by private builders were down 65 per cent to 14,665 between June and August. If it were not for housing associations, which registered 10,432 starts (up 8 per cent), the overall picture would be even bleaker.

The NHBC predicts that during 2008/09 as a whole, work will start on between 90,000 and 95,000 homes. This compares with 185,000 last year. A modest recovery is expected in 2009/10, when 103,000 starts are forecast, but no one should get too excited.

The only crumb of comfort is that the number of new homes being completed is declining only slightly. ‘They’re holding up better than expected,’ says NHBC operations director Ian Davis. ‘Builders are completing stock and selling that before they start building.’

Under normal circumstances builders continue to register new starts at the same time as they complete work already underway. ‘The emphasis [now] is on finishing work in progress,’ he adds. ‘They are looking to liquidate their stock as soon as they can to generate cash to meet interest payments.’

The NHBC’s projections show about 113,000 homes being completed in 2008/09 - down from 177,000 last year. Completions are expected to remain at roughly the same level as this year in 2009/10. ‘These are the worst figures that we can remember,’ says Mr Davis, recalling how, during the recession of the early 1990s, at least 125,000 starts were registered each year.

Although the housing market began to slow in late 2007, things only got serious from spring 2008 onwards as mortgage lending became increasingly tight. During the past six months, the three largest private builders have made a total of 4,000 staff redundant, while their half-yearly figures for the six months to 30 June confirm the grim picture.

Taylor Wimpey was formed last year by the merger of Taylor Woodrow and George Wimpey. It now hopes to save £45 million per year after closing a third of its 39 regional offices and shedding 900 employees.

Thanks to the merger, it can boast that it built nearly twice as many houses (up from 3,378 to 6,317) in the first half of 2008 compared with a year earlier. But that did not stop it recording a loss of £1.5 billion compared with an £18 million profit in the same period last year.

According to group chief executive Peter Redfern, Taylor Wimpey acted swiftly in response to a difficult trading environment in the UK and the United States. ‘We believe that both markets continue to be attractive on a longer-term view,’ he said in August, just two weeks before the company sold its construction business.

Persimmon made 1,100 office staff and 900 site-based workers redundant as part of a major restructuring that cost £15 million. Its profits for the first half of 2008 fell to £140 million compared with £315 million during the same period last year.And in a statement this week, the builder said it expected the selling price of its new homes to drop by 10 per cent in the second half of 2008 - double an earlier prediction.

Barratt Developments also hit hard times, announcing 1,200 redundancies in July, a month before its financial results for 2007/08 showed profits had fallen by 13 per cent to £392 million, but completions were up 8 per cent to 18,588 - partly as a result of it acquiring the developer Wilson Bowden.

Plan B

To ease the pain of the impending recession, more private builders are setting their sights on the substantial grants available through the national affordable housing programme. But that means they will be up against specialist developers such as Lovell.

Whereas the refurbishment and construction of social housing accounted for 70 per cent of Lovell’s revenue in the first half of 2007, it rose to 90 per cent during the same period this year. At the same time, open market sales plummeted from 323 to 107.

Peter Quinn, head of business development at Lovell, recognises that its business model partially protects it from the credit crisis. But he acknowledges that most social housing is part of mixed developments with shared ownership and open market homes, meaning it is not immune.
‘People are visiting our sites and reserving [homes] but they can’t get the finance,’ he says. ‘It’s a new phenomenon for the industry. Nobody is completely clear when it’s going to resolve itself.’

Persimmon expanded its public sector work two years ago after buying Westbury Partnerships, its social housing division. ‘There is a strong reason to be in the affordable sector. It’s the best of a bad situation,’ says director Ashley Lane. ‘But local government is looking for balanced communities. The idea of becoming mono-tenure is not practical.’

John Slaughter, director of external affairs at the Home Builders’ Federation, believes there is further opportunity for developers to move away from market sales - providing the government steps up support. ‘There is a massive need for more affordable housing,’ he says. ‘I think everybody will want a piece of the action.’

Many major builders offer a range of shared equity products, some in addition to the government’s homebuy schemes. ‘We are a very resilient industry,’ says Lovell’s Mr Quinn. ‘We’re trying to react quite flexibly.’

Persimmon matches money saved by would-be homeowners with Halifax through its ‘double your deposit’ scheme and offers buyers the chance to live in their new home free for one year by paying their mortgage, council tax and energy bills.

‘Developers are being as inventive as they can,’ says Mr Slaughter. ‘They are trying to find ways to help people get into the market and overcome some of the potential constraints over mortgage availability.’

He adds that, with the exception of Berkeley Group, which is buying up small sites while deferring larger regeneration schemes, most builders wish to avoid further land banking. ‘People are holding on to what they’ve got,’ he says. ‘There is very little activity.’

Jacqueline Esimaje, manager in development services at Tribal, says some developers are looking at long-term deals under which they pay less for options on land but still prepare for a recovery. ‘They are desirable for developers that are still trying to operate because they don’t have a large cash outlay,’ she says.

But when are things going to get better? According to Alan Cherry, chair of Countryside Properties, it could take three to four years for the industry to recover fully. On a positive note, banks have taken ‘a more sensible attitude’ than in previous recessions and to date no major builder has gone out of business.

‘I expect most medium to large companies will see their way through this difficult time but it depends on how difficult it becomes,’ says Mr Cherry. ‘The people that are suffering are small local builders that only build a few dozen homes per year.’

Mr Davis of the NHBC says banks are too heavily involved in the industry to pull the plug on a major developer in case they destroy their own investments. Banks should also be impressed by the response of companies so far. ‘House builders have probably responded faster and better than they did during the last downturn,’ he argues.

But that does not mean there won’t be casualties and further takeovers. ‘I expect that those that are weakest will get swallowed up by those that are stronger,’ he adds. ‘Whether we will see a major merger at the top I doubt, but there will be some in the middle ranks that may be swallowed up by other builders.’

Some builders admit privately that the worst year will probably be 2009. After that, it depends on the state of mortgage lending and wider financial markets. ‘The confidence factor needs to come back,’ says Mr Lane.

In the meantime, house builders struggle to recall when the industry faced a bleaker future.

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