UK residential development review

Residential Outlook Q1 2020

As many sites’ shutdown at the start of lockdown, new build development is subject to the twin effects of an uncertain economy and the physical disruption.

Housebuilding activity tends to follow wider housing market and economic trends. Three estimates of total net supply are shown in Figure 1 below, all of which suggest output in 2019 of around 250,000 homes.

Figure 1

The chart below shows new build completions by type plotted against total transactions. Private market output in particular responds quickly in downturns, falling from 147,000 in 2007/08 to 57,000 in 2010/11. By contrast, affordable housing delivery is relatively counter cyclical, with output remaining approximately constant through the 2008/09 downturn, subject to some volatility around changing funding programmes.

Figure 2

The chart below shows new build completions by type plotted against total transactions. Private market output in particular responds quickly in downturns, falling from 147,000 in 2007/08 to 57,000 in 2010/11. By contrast, affordable housing delivery is relatively counter cyclical, with output remaining approximately constant through the 2008/09 downturn, subject to some volatilHistorically, private market supply has made up around 1 in 10 of all transactions (new and second hand), although the introduction of Help to Buy Equity Loans from 2013 shifted the balance in favour of more new build, to around 1 in 6.4 in 2018/19.

We can therefore expect the number of new build transactions to track transactions in the second-hand market during the lockdown and fall steeply this year. Though also dependent on wider macro-economic conditions, this could lead to short-term negative pressure on new build pricing if developers currently underway with construction encounter cashflow issues. Tight margins in the construction industry and complex supply chains mean that many smaller housebuilders could struggle if the market does slow significantly.

Help to Buy was due to end in 2023 after being reduced in scale in 2021 (to lower value properties based on regional caps and first-time buyers only). There have been no official announcements yet but it is possible that these changes will be delayed in order to support the industry.

As well as a potential lack of demand for new homes, there are also practical issues around whether sites can continue to operate safely and in accordance with social distancing guidance. On 17th April Glenigan reported that 29% of UK construction sites were suspended.

Major housebuilders have taken different approaches, with some shutting down sites completely and others continuing where near completion or if essential works are needed. At the time of writing, Taylor Wimpey, Bovis Homes and Crest Nicholson have outlined their plans for phased reopening of sites starting in early-to-mid May.