The recent Labour party conference delivered two moments of levity for non-partisan observers. Firstly, a glitter incident that added a bit of excitement to proceedings, and secondly a clear sign that if the Labour party forms the next government, which currently seems odds on, the planning rules that seem to make every act of building complicated, from the humblest garage to Heathrow’s third runway, could be in line for a major overhaul. The question for investors is whether the freedom to build more houses will necessarily benefit the UK’s highly concentrated housebuilding sector.
Personal anecdotes of how maddening the planning system can be under the auspice of the Town & Country Planning Act are legion, and many a neighbourly feud has started with a planning application of one kind or another. However, whether it is the planning system becoming so unwieldy, or the simple economic calculations of the market driving up building costs is a source of debate.
One theory is that there is a folk memory of some truly terrible planning decisions in the 1960s and 1970s that did immense harm to the urban environment. Whether that is true, or not, the basic anomaly is that the architecture of the current planning system was in place at a time in the 1970s when houses were being built at a rate of 260,000 completions a year, despite that decade’s well-recorded economic and political turmoil, according to the Building Cost Information Service (BCIS).
The BCIS also highlights the paradox for private housebuilders and the way the market values them. “Housebuilders’ share prices go up if they have unused land; [they go] down if they have unsold houses. Therefore, the private sector views housing demand solely as those who can afford to buy the houses that are available at a price that returns a profit.” Getting more houses built under such circumstances therefore has less to do with the state of planning than with the economic incentive and ability of buyers to pay the prices demanded. The other salient point is that building has become a very concentrated business. The BCIS estimates that the number of independent building firms started to decline in the 1990s, removing at least one source of regular annual housebuilding.
However, not even the debate over supply and demand is straightforward when it comes to housing in the UK, as experts in the field point out.
Lack of planning is the problem?
“There is a misconception that there is a housing crisis in this country,” says Dr Richard Parker, a planning and historic buildings consultant. “Actually, the real issue is that many buildings are simply underused, or not utilised.” Dr Parker points out that one of the strange anomalies in the current system is that conversion of older buildings to new purpose or multiple dwellings – which would go a long way to create new city housing out of abandoned retail units – is subject to VAT, while new-builds aren’t.
“It offers very little incentive for housebuilders to take on the risk of converting existing properties, and, in some ways, the issue is not the absence, or ease, of development but a lack of planning at council level as departments have been downsized and fewer officers are having to take on more work,” Dr Parker said.
So where does this leave the housebuilders facing a potential housing slump, and how should investors view them? While there has been support in the market for housebuilders recently, not least on the potential for changes to the planning system, most of the risks in the sector are largely beyond their control, although recent undershoots on inflation data (save for September's flatline) suggest that further interest rate rises can be paused, which is a very big positive. Indeed, the best that many analysts can say is that conditions will be tough for the next six to 12 months, at least. This applies as much to those who supply to the trade as the trade itself. The recent profit warning released by builders’ merchant Travis Perkins (TPK) is a case in point.
One issue is that as most houses tend to change hands in the second half of the year, after the peak spring marketing period traditionally leads to the autumn exchange and moving season, that poses a risk for some housebuilders that have a heavy second-half weighting. Among the listed companies, Persimmon (PSN) and Taylor Wimpey (TW.) tend to generate around 55 per cent of their business in the second half. Both companies are due to report trading updates in November. At least this is not as exposed as surveyor and estate agent Savills (SVS). Peel Hunt analysts reckon that its second-half weighting is 85 per cent of its total business.
Share prices have found support his year, with the average housebuilder still 3 per cent higher over 12 months of trading, although this does mask some significant falls in the past half-year. It should be noted that major declines were already seen in 2022 as the market started to price in the inevitability of interest rate rises. On the evidence of Bellway (BWY), whose results we cover in-depth this week, the sector will get a relatively easy ride from investors who have already factored in the negatives. Whether that translates to a rebound in valuations is a moot point, but at least investors seemed to have accepted the known unknowns so far this reporting season, while the planning system, as far as we can tell, seems to be down the list of the sector’s immediate problems.
