Since the property market soured, the HCA has been propping up the housebuilding industry. Funding has enabled the construction of 40,000 homes through HomeBuy Direct and Kickstart monies. HomeBuy, which loans deposits to first time buyers, has generated an estimated £2bn of house sales. Kickstart, which injects grant aid to make stalled developments viable, has unlocked hundreds of mothballed sites. Now, both lifelines look set to be cut.
Full details of which projects will have funding cut will not be known until June’s emergency budget. Adding to the uncertainty are fears surrounding the new government’s planning policies. Under the banner of ‘localism’, the coalition dramatically scrapped regional housing targets last Friday, handing power back to local councils to decide how many new homes are built, and where. Dubbed a “Nimby’s charter”, planning experts fear it will result in far fewer homes being built.
Cuts hit home
So just how bad is the outlook? In the short term, the HCA has frozen £263m of Kickstart funding already allocated to housebuilders including Berkeley, Persimmon, Redrow, Barratt and Bellway as it decides how to make £50m of cuts. However, industry magazine Building speculates that the HCA will be unable to help fund any residential schemes for a whole year as it faces a £610m black hole in its accounts.
The future for HomeBuy Direct is also far from cheery. The current round of assistance comes to an end this September, and there is now scant hope that the deposit-funding scheme will be continued. The sudden withdrawal of support creates worries about sales volumes going forwards. However, the quoted builders have yet to make any public comments on the potential impact to their finances. Their public relations teams argue it is impossible to comment, seeing as the true extent of cuts will not be known until 22 June.
“Last year, almost every other new home sold had some kind of funding assistance from the HCA,” says Joey Gardiner, news editor of Building magazine. “Housebuilders thought they had the Kickstart money in the bank, and will obviously be hit if it doesn’t come through.”
Now the housing market has improved, with average house prices jumping over 10 per cent in a year, support from the tax payer is harder to justify. “If they’d done this a year and a half ago, it’s possible to argue not all of the big builders would have survived, but they’re in better shape today,” he says.
Nevertheless, mortgage companies are still insisting on large deposits for new homes, and housebuilders are hooked on loaning buyers deposits – it is a highly effective sales tool. However, it’s not good for the long-term health of balance sheets.
“Housebuilders have to generate enough cash to meet their banking targets, and if funding is taken away, this becomes more difficult to do,” notes Rachael Wareing, housbuilding analyst at Panmure Gordon. “This will have a short-term impact on volumes, but in the longer term, builders have been actively re-planning sites to make them work. If HomeBuy is completely withdrawn, this will impact on their bread and butter market – first time buyers. However, all the builders have their own shared equity products, and they’re pretty innovative as an industry. It will be a temporary hitch.”
The housebuilders have little choice but to revert to their own shared equity products, tying up more free cash flow, and increasing their direct exposure to house price movements. Insiders say that the hoped-for revival of MIGs (mortgage indemnity guarantees) has proved fruitless, as the costs of setting up a suitable product are prohibitively high.
Hopes that the mortgage market would become more competitive after Santander relaxed their loan-to-value requirements to 90 per cent for first time buyers in March have proved unfounded – other lenders haven’t followed suit. And mortgage lending figures for April made shocking reading. Not only was a 12 per cent monthly fall recorded, they were the lowest April lending figures in a decade – and all this in the so-called Spring Selling Season.
Build them up, knock them down
Funding cuts are unwelcome, but changes to the planning system could be an even bigger nightmare. Following the Decentralisation and Localism Bill announced in the Queen’s Speech, Secretary of State Eric Pickles’ announced last Friday that regional housing targets were to join Home Information Packs on the housing policy bonfire. South Oxfordshire district council immediately scrapped plans for 5,000 future homes.
The Home Builders Federation blasted the move, saying it would worsen the UK’s acute housing crisis, but the government claims localism will encourage more homes to be built.
“Giving financial incentives to councils to approve housing schemes looks good, but in practice, it will only help regenerate deprived areas which are marginal areas for the housebuilders anyway,” argues Mr Gardiner. “In the wealthy Shires, with the highest housing demand, councils aren’t short of a bob or two. They won’t risk a few extra quid for approving a 1,000 home settlement which will enrage local voters.”
More details on this Bill will emerge in due course – in the meantime, the uncertain outlook is sure to drag share prices down further across the sector. Potentially an opportunity for long-term investors to buy in cheaply, is there any good news to look forward to?
There are hopes the coalition could cut a little more red tape. Any housebuilder will tell you that the economics of development are at breaking point due to the growing regulatory burden. This includes planning gain payments to local authorities, high social housing provision, environmental obligations and the zero carbon agenda. In the end, someone has to pay. If it’s not the consumer in the form of higher house prices, then it must be factored into the price of development land. Seeing as the housebuilders are sitting on expensive legacy landbanks, and the land market remains tough (see column, right) it’s wiped straight off their profits.
Those in the industry report than planning gain payments are no longer demanded up-front by some local authorities, but staged to match development milestones. A relaxation of social housing targets would also be received positively by builders. But what would really cheer them up is the disposal of vast tracts of public-sector owned land (we’ll have to wait and see for that one).
One good piece of news is that the Lib Dem’s nightmarish policy of applying VAT on new homes is thought to have been dropped (though yet again, no formal announcement has been made). Analysts reckon that if VAT were introduced, housebuilders would immediately have to write-down their landbanks by 5-10 per cent.
The volatility looks set to continue, but analysts tend to favour Persimmon, which has already made substantial write-downs to its landbank, and Barratt, which is trading at the deepest discount to net asset value (currently around 50 per cent).
