It sounds like a slogan from the 1930s. But the government’s campaign to “get Britain building again” was launched at the end of last year, amid rising unemployment, a stagnant economy and the lowest number of new homes being built in the UK for more than half a century.
For housebuilders, the government’s plan to boost construction by freeing up lending and land has come not a moment too soon. The industry has survived a gruelling five years in which land values dived and home sales halved.
Now construction is seen as crucial to economic recovery and housebuilders are poised to benefit. Starting in March, a government scheme will help people buying a new-build home to borrow up to 95 per cent of the property’s value. Final details are still being thrashed out but the programme will work by providing a guarantee to lenders – shared by housebuilders and the government – that protect banks from losses should a customer default.
Charlie Campbell, an analyst at Liberum Capital, says the so-called NewBuild Guarantee should drive housebuilders’ profits and shares upwards. “It’s very positive. It’s good for the industry because it will encourage a shift from second-hand homes to new-build, and it will encourage new housebuilding with all its benefits for jobs and the economy,” he says.
Any rise in house prices should be marginal, he adds. Credit-squeezed banks are more likely to raise the share of loans they provide to new-build than increase lending overall. But the gap between offers and asking prices of houses – now running at about 7 to 8 per cent – should narrow, lifting margins and profits.
Homebuilders have already benefited from earlier government programmes to aid first-time buyers. Persimmon, Britain’s second-biggest homebuilder by value, sold 600 homes – or 12 per cent of the total in the UK – in the second half of last year through the FirstBuy scheme, an interest-free loan for housebuyers from the developer and the government which is expected to expire in April.
But the NewBuild Guarantee should be better for the industry as it requires smaller contributions from housebuilders than previous government schemes. “If new-build takes share from existing stock, profits will go up quite a lot because the contributions they need to make will have gone down,” says Mr Campbell.
Peter Redfern, chief executive of Taylor Wimpey, estimates that housing construction may rise by 15 per cent or more after the measure goes into effect in the second quarter. “Once we get that flow of new homebuyers in the market we think we’ll be able to sustain it,” he says.
Undoubtedly, housebuilders are running leaner, more efficient operations than they were five years ago. Sixty per cent of build costs is spent on land, infrastructure and social contributions; with the balance divided equally between materials and labour, according to the industry’s rule of thumb estimates.
But costs have fallen. A tight jobs market and dearth of new projects has forced brickies’ wages down by a third, while years of living with a slowing economy have prompted cost-saving innovations. Open layouts save on interior walls, for instance; pre-made doors can be produced cheaper off site.
Above all, housebuilders have benefited from cheaper land prices since the start of the recession. The bigger companies have shored up balance sheets by developing land bought three years ago. Gross margins have increased from 5 per cent on land acquired in 2007 or earlier to 20 per cent or more on land bought between 2009 and 2011.
“The big companies are now developing sites where they either didn’t pay a lot for the land or where they have already written down the cost,” says Chris Baldwin, head of residential at Drivers Jonas Deloitte, the real estate consultancy. “Even given a poor housing market they are able to deliver bigger profits to shareholders than expected.”
Not all markets are equal, of course, and not all housebuilders are likely to benefit to the same extent from the new scheme. Berkeley, the upmarket London housebuilder, has remained perky throughout the downturn. Its buyers have little trouble accessing credit and its tasteful urban developments – near tubes and shops – are sought after by wealthy foreigners.
But life has been tougher lower down the ladder, where credit is tight. Housebuilders have flocked to the more wealthy south-east – and shifted from building apartments to higher-margin family homes as they seek buyers with cash already in the bank. Here, the new mortgage indemnity scheme should make a difference.
Not everyone agrees that the programme will work. Ed Balls, treasury spokesman for the opposition Labour party, derided the project as “small beer”. Homebuilders’ shares are yet to reflect the potential profits boost.
But Mr Campbell is optimistic. “It ought to be the case that if you build a new house, the brick factories fire up, the brickies get to work, the housebuilders do well and the economy is stimulated,” he says. “There isn’t really anything else in the government’s barrel so it would be good if this could succeed.”
£400m to help revive schemes
Get Britain Building fund: A total of £400m will be spent on schemes that housebuilders have put on hold, for example because they cannot pre-sell enough homes or lack working capital. Ministers argue the money could support 16,000 new homes and 32,000 jobs.
Right-to-buy discounts: Increasing to 50 per cent the discount for council house occupants to buy their own home should trigger a surge in right-to-buy deals. But there are fears the total social housing stock will decline further.
New-build guarantee: As many as 100,000 people will be able to buy new-build homes with deposits of 5 per cent because the government and builders will together underwrite 9 per cent of loans. Housebuilders will contribute 3.5 per cent of a property’s value to an indemnity fund and the government will add 5.5 per cent.
Banks including HSBC, Lloyds and Barclays have agreed in principle to back the scheme, which will provide a guarantee to protect banks from the first 10 per cent of losses in the case of default.
More than 25 homebuilders have agreed to participate, including Barratt, Persimmon and Taylor Wimpey. All potential buyers can make use of the scheme – not just first-time buyers. Only buy-to-let investors and second homeowners are excluded. It will cover only new-build homes in England, but similar schemes are under consideration in Scotland and Wales.
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