Super Eight

At the point of writing this week's blog, we are now a week after the published Competition and Markets Authority report on the housebuilding market, the dust has settled a bit, and most industry voices have had their say on the findings. So, rather than this blog being a news headline-orientated piece, we are working on the assumption that most readers are aware at the point of reading that there were significant failings and concerns raised around the planning system, the quality of housing stock being produced, and the some of the practices of the prominent actors in the sector in and around information sharing. There has been a trend in financial news media over the years to create numeric groupings of businesses with a cinematic twist for a punchy illustration: the dirty dozen, the magnificent seven, so without naming names, let's refer to these businesses as the Super Eight.

Starting with planning, something that has a direct impact on the SME developers operating in our sector, the report found that around 60% of all houses built in 2021 to 2022 were delivered by speculative private development, which the report describes as businesses obtaining land and securing planning on spec with the goal being selling into the private market.

Now, the angle looked at in the report is that an over-reliance on this kind of development on a national level is intensely problematic; it's essentially now a privatised market that can never keep up with community needs as private sector developers sole purpose is to seek the best return for their product they can get, ergo it's subject to market forces slowing down production, there isn't any element of centralised town planning going on to build communities, and there is limited quality control.

However, what's interesting about this report is that it outlines SME developers' importance in the sector; coupled with the Super 8, they are responsible for a considerable chunk of the supply, so the interventionist policies being suggested here aren't saying "stop what you’re doing" they are saying, "we need to help you do this better." Streamlining planning systems and increasing consumer protection will enable SME developers to do a lot more speculative development; the speculation element isn't the issue; it's the mechanics of the system that need to be altered. To quibble with the language, almost any endeavour to put bricks in the ground was speculation at some point; in 220 BC, they speculated on building a big Wall in China; speculation and opportunity to create something go hand in hand.

One of the interesting points of note in the report was the findings on the much-debated land banking. Back in October 2018, a report by former Conservative Oliver Letwin into Land Banking found it not even to exist; the common perception back then and to this day was that the Super Eight manipulate price and supply by stockpiling land and drip-feeding it into the system when they need it. At the time, 15 large sites and 70,000 homes were looked at, and no clear evidence could ever be found. Cut to the present day, and that same process has been repeated in this report, with over a million plots of land looked at, and the same conclusion has been drawn. The actual findings are somewhat less Machiavellian and mysterious; rather than a secret cabal of price fixers monopolising supply, what you have is a colossal number of incredibly fed-up builders, unable to move from scheme to scheme fluidly and having to stack up sites in advance, because of the broader failings within the planning system.

One thing that the report can't escape from is the persistent and entrenched shortfalls in supply; we have raked over the coals of this in recent blogs, so we won't spend too much time unpacking these figures, but the size and the scale of the opportunity here from an investment perspective is gargantuan in scale, UK housing may have been heavily commodified in the late 1970s. Still, unlike most instances where product markets are saturated due to being over-commodified, this has an almost unquenchable demand; being that the product is literally on Abraham Maslow's hierarchy of needs, the need for shelter & homes will be forever expansive with population growth. With less than 250,000 homes being built last year across Great Britain, 50,000 units were being delivered by the thousands of smaller regional businesses our sector supports. So again, let's assume the Super Eight overcome their recent troubles, continue their trajectory, and build 80% or four million more units of the five million missing we need; that's still a million homes our sector needs to fund and develop in the coming years and decades. Gargantuan in scale, as mentioned.

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