Understanding the Residential Sector (Guest Article)

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. But the government remained committed to increasing housing output, with a new stated targets of 300,000 pa. This has remained no more than an aspiration with the best level of actual completions achieved in 2019 at 206,000. 2021 saw a level of 200,000 but the forecast for the next few years is down on this (Hewes & Associates).

During the last twenty years we have seen the number of small building firms fall dramatically. Brexit has also seen a fall in available skilled site trades and this is against a background of material shortages due to the pandemic and war in Ukraine.

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 has been a lot of commitment from government to support design for manufacture (encompassing offsite and modern methods of construction) as well as net zero carbon. Both of these will feed into the housing sector.

However this approach to residential construction remains fragile with some offsite factories having been closed. To be successful this system needs a guaranteed and steady pipeline of work.

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.

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 Marketing to Contractors & Housebuilders feature (which is sponsored by South East Construction Expo) in the Sectors section of our Directory provides an overview of the sector,
including details of its various media channels and events, together with access to our downloadable database of those with responsibility for procurement at key firms.

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 15 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.

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