The new Labour government campaigned on a pledge to build 1.5 million new homes in the next five years. A month into power and a new Planning and Infrastructure Bill has been announced in the King’s Speech to parliament.
The government needs the house building industry building 300,000 homes a year, roughly an extra third on what it’s currently building.
Here’s what opportunities this could create for investors.
This article will look at what these plans could mean for investors, but it isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice. Remember, investments rise and fall in value, so you could get back less than you put in.
Get latest insight and expert analysis on what the new Labour government could mean for you and your money.
What are the opportunities and challenges for housing developers?
Planning permissions
Major house builders face an interesting future. Big traditional players like Persimmon, Taylor Wimpey or Barratt Developments could see easing in some of the widespread planning delays across the industry.
The new bill is expected to introduce measures like hiring more planners and reducing the ability of councils and local residents to slow or prevent developments from going ahead.
However, the last government also introduced measures designed to ease the planning process, which didn’t work. Objectors to a development can still head to court, causing delays and likely pushing the build rates out into the future.
Workforce shortages
Then there’s the small matter of actually building the homes.
It will take time for the industry to scale up. Maintaining the construction sector at its current size needs almost a million new recruits by 2032 due to the ageing workforce. Holding output steady against a trend like that will be challenging enough.
The current shortage of housing does help to protect the value of builders’ landbanks. Even if the flow of planning permissions increases, the current absence of the extra staff needed means margin pressures could cause a real challenge. Builders can't necessarily pass rising labour costs onto home buyers, unless house prices are firming.
Interest rate changes
Interest rates are now starting to fall – the Bank of England cut them to 5% last week.
An environment where planning isn’t getting any harder at the very least and where mortgage rates are easing should be good news for the industry.
A planning free for all could see gluts appearing, so predictable planning outcomes would clearly be welcome. Legislation isn’t making house builders increase their output yet, so they’re currently likely to build as many homes as they can, at the rates of return they’re after. That should prove supportive for home building shares, so long as individual builders run their operations efficiently.
Some might be better placed than others to benefit from this environment.
If the likes of Persimmon, Taylor Wimpey or Barratt Developments can manage the flow of planning permissions and assemble workforces to build out their landbanks, we could see a healthy operating environment for some time – especially now that interest rates are starting to fall.
Labour’s plans for affordable housing
The new government wants a greater focus on social housing provision than it’s had for some time. This could make it harder for developers to maximise margins.
But some companies are focused on working with councils and other social landlords to make new communities of affordable homes. These companies could be well placed to benefit from the drive to boost supply of affordable homes.
One of the UK’s biggest housing developers, Vistry, recently merged its homebuilding division into its Partnerships arm. This leaves the business with the primary focus of developing land in partnerships with local authorities and social landlords.
As the remaining traditional housebuilding landbank is worked through, Vistry will become more and more focused on the affordable housing sector.
It’s a different model to traditional building. The land is provided by the social partner and Vistry brings the development skills. With less need to own land, the group can be relatively ‘asset-light’ compared to a traditional builder, with an expectation of higher returns on the smaller amount of capital it still needs to deploy.
On the downside though, Vistry has to keep a pipeline of development schemes and often it will be dependent on its social landlord partners to bring a project to the starting point.
What should investors look out for?
The building sector is notoriously volatile and homebuilder shares can be punished badly when interest rates turn up, or consumer confidence slips unexpectedly.
Investors should be wary of housebuilders with significant debts, or weak track records of managing costs.
There’s also an ongoing enquiry into past practices in the sector. Most listed major players have been named by the Competition and Markets Authority in an investigation into anti-competitive behaviour, which could lead to fines of as much as 10% of turnover.
But there’s still a fundamental shortage of housing in this country and the government’s plans to date won’t change that much. Ultimately that should be positive for strong players in the markets for both privately owned and affordable or social homes.
One way to invest in housebuilders – HL Select Funds
Steve Clayton is Head of Equity Funds at HL and leads the HL Select fund team.
HL Select is a group of three funds focused on a small number of high-quality shares diversified across industries, which the management team believe have long-term growth potential.
Persimmon is a holding in the HL Select UK Income fund and Barratt Developments is a holding in the HL Select UK Growth fund.
The HL Select funds are run by our sister company Hargreaves Lansdown Fund Managers Ltd.