Competitive Advantage Consultancy
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Here, Competitive Advantage takes a look at the residential construction sector and how it is evolving.

The residential construction market is influenced by the state of the economy, interest rates, real income and changes in the size of the population. Today the majority of UK homes are built by less than 20 organisations, yet with increasing demand for housing output how is the market evolving?

The housing challenge
In 2007, the government estimated they would need to build 240,000 homes a year until 2016, to keep up with growing demand. Yet, after the credit crunch, housing completions fell to 100,000 a year. At the same-time we have seen the number of small building firms fall dramatically.

But the government remains committed to increasing housing output, and now have a higher objective of achieving an output of 300,000 pa, a level which has not been achieved since the 1960’s. This is against a background of labour shortages and slow planning approvals.

NHBC revealed that the number of new homes completed in 2017 was 160,606 – 6% higher than the previous year, representing the highest new home registrations since 2007. 2018 to 2020 are forecast to plateau at around this level and then fall as we approach 2021 (Hewes & Associates).

It can be argued that the traditional model for home building will not support these ambitious growth targets. The established private developers, of which Barratt, Taylor Wimpey and Persimmon are the largest, are unlikely to increase their output by more than a few percent each year. And it does not make good business sense for them to undermine demand by over-supply to their market, equally they lack the resources of land, people and materials to significantly lift output.

How residential construction is responding
There is a lot of commitment from government to support the housing sector, and with new players entering the market, as well as a drive to use design for manufacture, new methods of meeting demand are emerging. 

cadv housebuilder

Government support for residential construction
Having realised the link between young voters and the shortage of homes, the Government have been supporting the residential construction sector. One solution was “Help to Buy” first introduced in April 2013. Since 2016 it has represented more than 40% of annual new build sales. Yet there have also been claims that it has supported the profits of the major housebuilders, adding to house price inflation. This was not helped by the £75 million bonus paid to Persimmon’s CEO, Jeff Fairburn in 2018. The Help to Buy scheme will be limited to first time buyers from 2021 and is currently set to end in 2023.

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A solution to labour shortages is Design for Manufacturing of which Offsite is a major part. The Government is encouraging this as an option and a number of developers have announced or even opened manufacturing facilities in the last couple of years. The Letwin Review, published in October 2018, has recognised that housebuilders were not land-banking and has proposed various measures to improve the speed of planning approval for residential developments and proposed a mix of home types should be released on site, to encourage transactions and improve ‘absorption rates’. These recommendations have been adopted by the Government.

Changes in delivering Public Sector Housing
Homes England is the agency for delivering public sector housing. Launched in January 2018, the remit is to adopt a more commercial approach to acquiring, preparing, managing and developing land in areas of high demand. The first strategic plan was published in October 2018.

And the HRA (Housing Revenue Account) borrowing cap has also been lifted, which will allow Local Authorities to borrow against their existing assets to build homes. It is estimated this could create 12,000 new homes pa.

We have also seen the growth of some of the Housing Associations into large developers, who fund construction of their rental stock through building and selling properties into the private sector. London & Quadrant along with Notting Hill Genesis are two examples of these organisations.

The Private Rented Sector - a new approach
A significant sector to have developed in recent years is the Private Rented Sector (PRS). This is quite different to the old Buy to Rent which comprised many small landlords operating small numbers of properties, often of dubious quality. PRS comprises large organisations, many backed with significant overseas investment. They include such companies as Argent Related, Criterion Capital, Dandara Group, Moda and Quintain. These organisations tend to focus their activity around one or two cities where they are building out large developments.

They have a different philosophy from landlords of the past, aiming to provide properties for the young professional which offer a higher quality lifestyle compared to traditional rental. Each of these developers has introduced features to try and differentiate them – a balcony for every apartment, Uber accounts or all utilities as a package are examples.

Build for Self
By ‘Build for Self’ we mean homes that are commissioned by the occupant. This might be a large mansion, or a more modest construction. The primary difference is that the developer is also going to live in the house, so product selection is based around value for money and convenience for residence and not lowest cost. In many cases homes will be the ‘dream home’ and have been planned for many years. Which also means product choice will have been well researched. The majority are detached properties. Self-Build does not mean that the owner will physically construct the home, although this does happen. They will commission an architect and employ a builder, or perhaps act as site manager and employ the various trades.

The Self-Build sector has been in place for many years, but was recognised by the government as a sector worthy of support following the 2007 crash. Effort has been made to make it easier for people to source land, with legislation introduced in 2017 which requires Local Authorities in England to maintain a register of people who wish to self-build and also ensure there are enough ‘shovel ready’ plots available. The National Custom and Self Build Association was formed to help the Self-Build sector and to help and encourage self-build.

Although self-build is a growing sector which has demand for premium products, because of one-off builds it is also a very fragmented sector.

Building Product Specification in Residential Construction
The sub-sectors of residential construction differ in their approach to design and so building product specification. To summarise:

Large Private Developers and specification: Large Housebuilders tend to have an in-house team who select products, operating with a set of standard designs which are reviewed every few years, when external architects may be used. Product selection is generally about lowest cost, with the exception of ‘eye catching’ areas like kitchens and bathrooms where higher specification products may be selected.

Social Landlords: Many properties are acquired as a result of Section 106 agreements, in which case they are constructed to a relatively low specification by a private developer. When Housing Associations build their own properties they tend to be to a higher specification, with a focus on minimising operating and maintenance costs. In these cases development will involve an external architect or may be Design & Build.

Private Rented Sector: These organisations are bringing a new approach to construction, looking at new partnerships with the construction team as well as selecting products which offer quality and value throughout the life of the property. They use external architects, but also have in-house decision makers and value the input of their contractors.

Smaller Builders and Self Build: Homes individually designed by an architect with product selection heavily influenced by clients. While clients can be very influential, their knowledge and understanding of construction products is limited and the input of a builders' merchant can be important.

Conclusion
In the last 10 years we have seen residential construction evolve from a simple split between private and social housing. Today we have a more diverse approach, with PRS and Build for Self sectors.

The building product manufacturer that wishes to supply beyond the major private developers, where price is often the key factor, needs to learn the new channels to market, identify new decision makers and develop new contacts. Key influencers can be offsite manufacturers, contractors and builders’ merchants. In the Build for Self sector the client can also be an important decision maker. We have seen a number of building product manufacturers commission research to help them better understand these new routes to the housing market.

In order to purchase Competitive Advantage's "Developing Construction Personas: The Large Housebuilder", click here.

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