A record number of housebuilders are continuing to go bust, according to data obtained by Price Bailey, 368 developers filed for insolvency last year compared with 207 in 2016, with the increase said to be threatening the supply of new homes.
Price Bailey obtained data from the Insolvency Service under the Freedom of Information Act, which showed that a record 368 housebuilders went bust in 2019, compared to 312 in 2018, 253 in 2017 and 207 in 2016, which represents a 78% increase over the three-year period.
Price Bailey says that while many of the UK’s large listed housebuilders (e.g. Persimmon and Bovis Homes) have posted record profits over the last few years, SME housebuilders in particular have been squeezed by a convergence of factors, including stagnant house prices in London and the South East and rising material and labour costs. The depreciation of the pound has pushed up prices of raw materials and the exodus of Eastern European workers has contributed to high wage inflation.
Paul Pittman, Partner at Price Bailey, said “Many of the listed housebuilders paid out record amounts in dividends last year as profits were boosted by the Government’s help-to-buy scheme. Their success has obscured growing financial distress in the rest of the housebuilding sector. Housebuilding in England reached a 30-year high in 2019 but the collapse of a record number of smaller developers threatens to undermine progress.”
“Rising house prices, low interest rates, a competitive mortgage market and the Help- to-Buy scheme have all helped to deliver bumper profits for larger housebuilders. At the other end of the scale, smaller housebuilders have seen their margins squeezed by rising labour and materials costs and a planning system that stacks the odds against them.”
“Subdued activity and falling prices as people defer purchases due to coronavirus and Brexit uncertainty will continue to exact a heavy toll on the smaller housebuilders who do not have the financial cushion of their listed rivals.”
Price Bailey points out that Newcourt Residential, a small housebuilder focused on the high end market in London and the South East, collapsed in August 2019 after it ran into cashflow difficulties, while three property development companies owned by Kevin McCloud, presenter of Channel 4’s Grand Designs, went into liquidation last October.
According to Price Bailey, the loss of smaller housebuilders undermines the ability of the housebuilding industry to deliver a sufficient number of new homes to meet the country’s housing needs. Smaller housebuilders are more likely to develop smaller plots, brownfield sites, are less likely to landbank and tend to deliver a more diverse range of housing stock.
Pittman continued “Small housebuilders used to deliver a much higher proportion of new homes but their contribution to new housing stock continues to dwindle. They are often much better placed to develop small parcels of land on brownfield sites, which larger developers tend to overlook. As the housebuilding market becomes increasingly dominated by a few large companies, competition is being stifled,and buyers have less choice.”
The state-owned British Business Bank launched its ENABLE Build scheme in May 2019, which will make up to £1bn of guarantees available to banks that lend to small builders. This is intended to increase lending to smaller developers and encourage new market entrants.
Pittman said “Recognition from the Government that a vibrant ecosystem of small developers is vital to meeting housing targets is welcome, though obstacles remain. Small developers still struggle with a cumbersome planning system, which exposes them to disproportionate uncertainty and risk. Public sector bodies could do more to work with small builders so that small plots of land can be identified, developed and quickly brought to market.”