The number’s up for housebuilders

By Giles Barrie

Property Week’s Resi 09 conference got the City talking about housebuilding. And Barratt and Redrow followed suit last week by announcing £843m in equity issues to buy land

But once they have raised that money, how will they make development viable once again?

It is a question that retail, office and industrial developers are also asking themselves. But they should think themselves lucky when they consider the burden faced by their residential counterparts.

If housing starts stay at today’s pitiful levels, the whole economy will remain on its back. Based on real case studies, here is how a housebuilder’s sums add up in the recession:

Real example 1: A home counties strategic site

This would create an average surplus of £71,000 in sales per plot after build costs and a developer’s overhead and profit.

Deduct £22,000 per plot for money invested in infrastructure and £25,000 for the cost of the land, and you are £24,000 in the money.

But then take £18,000 to subsidise affordable housing, £21,000 for section 106 payments and you are under water. Factor in the looming £10,000 to comply with the “Code 4” sustainable homes, and then add £5,000 for the community infrastructure levy, and the result is a scheme that is undeliverable.

Real example 2: a site in the Midlands or north of England

This could be expected to create a surplus of £19,000 per plot. Remove £4,000 for infrastructure and £18,000 for the cost of the land, and this pushes you into the red.

Take another £7,000 for affordable housing and £2,000 for section 106 payments and you are further under water.

Now prepare to remove £6,000 for Code 4 and another £5,000 for the community infrastructure levy, and the result is another development that is completely unfeasible.

It is not surprising, therefore, that open-market housing development starts will be lucky to beat 70,000 this year — well short of the government target of more than 150,000.

Even if the economy recovers and helps to create 10% growth in annual starts, this will still only provide 1.1 million homes by 2016/17, compared with a government target of 2 million based on what Britain needs.

So what happens next?

For housebuilders, the new buzz term is “free cashflow”. Persimmon chairman John White told Resi 09 that all the big housebuilders had been seduced into a “volume” game by rising prices and government targets.

That game is up, and the simple sum used before starting on site will be the difference between costs and receipts, with no fancy projections.But if housebuilders are having to make tough choices, so must local councils.

If sustainability is your priority, you can have Code 4. If you want a new school or road, you get section 106. Want some affordable housing? Fine.

But from now on, the message to get Britain building again must be: you can’t have the lot.

(Giles Barrie, Property Week) http://www.propertyweek.com/story.asp?sectioncode=38&storycode=3150116

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