Barratt profits as houses shrink, but don’t blame the builder

Even tiny houses are worth a lot these days. Images_of_Money

Bosses at Barratt Developments, the UK’s largest housebuilder, could be forgiven for awarding themselves a pat on the back at the company’s AGM today. Advance sales are up 47%, aided by the government’s Help to Buy scheme and pre-tax profits this year are expected to be around £300m.

And yet the UK has some of the smallest new homes in Europe, often criticised for their poor design. So is this a clear example of corporate profiteering? Not quite.

The way land is bought and sold in the UK means standardised houses (that could be built anywhere) have to be fundamental to the business model of volume housebuilders such as Barratt or its rival Taylor Wimpey. Money is made in land rather than in housing itself. Better quality, bigger homes and lower density developments will only come about through changes to the land market.

Volume housebuilders are the key to delivering new homes and the planning system’s biggest and most litigious customers – their decisions matter. Currently, they use relatively simple methods to deliver simple products. Site design is a well-rehearsed process of laying out appropriate house types within a given site area. To help explain why they take this approach, it’s important to look at housebuilder strategy.

Strategic building

My recent research found that land acquisition and construction efficiency are the two most important factors determining the behaviour and success of speculative housebuilders.

Housebuilders must compete with one another to buy viable housing land in suitable locations. Given the UK’s restrictive planning laws, there isn’t much of this land available. This competitive, risky and expensive part of the development process takes up a significant amount of housebuilders’ focus and resources.

Yet it offers no guarantee of success until planning permission is achieved and most houses are sold, which can be years into the future. Because housebuilders purchase land before they build and sell new homes, the opportunity to maximise gains (thereby securing the necessary rate of return and reducing development risk) must be found elsewhere in the development process.

Most volume housebuilders seek to maximise profits by minimising expenditure during the design and construction phase of the development process. To do this, they make their products and processes as efficient and standard as possible. These “design efficiencies” result in houses comprised of a standard footprint and an off-the-shelf façade.

This allows costs to be forecast accurately and more readily contained, and designs can be reproduced efficiently and flexibly. While most footprints largely go unchanged from site to site, facades can be easily “tweaked” to match requirements without the need for extensive re-design.

Product quality can suffer in this standardised and repetitive process. New housing is generally built by sub-contractors, so the housebuilders often have little direct control of the day-to-day management of the construction site. Snagging (checking for defects) is often seen as a standard part of buying a new home.

Land pressure

The land market, when combined with policy-driven density targets and a lack of mandatory design policies, also explains the pressures to produce smaller homes; to secure the best sites, housebuilders must increase the amount of developable “value generating” space to produce the best land value. Hence small houses.

Design change won’t come from the housebuilders themselves. They don’t currently operate in an environment that is conducive to doing things any differently. Profit isn’t secured by the design of their product; it’s secured in the land market.

We must change the way in which developers buy land for residential development. We need to achieve a position where housebuilders secure their profits through the quality of their homes, rather than through the land market. And we need clear, mandatory, transparent design standards championed and implemented by local planning authorities.

Currently, landowners walk away from most residential land deals with a relatively risk-free income, generated by the planning system and extracted by housebuilders who themselves bear all the risk. If we want bigger and better new homes, it is in land policy and design policy where the opportunity for change can be found, not in the boardrooms of housebuilders.