Sunday, November 20, 2005

Less is more: the story of Britain's big housebuilders

I’ve written about the UK building materials sector previously on this blog: see entries for August 4 and August 5. What occasioned that was the takeover bid for BPB by St Gobain. Nearly four months later and this bid looks like succeeding. And in the meantime another bellwether of the UK Building materials sector, Pilkington, the glassmaker, has also been bid for and looks like being taken out by Nippon Glass. If Pilkington goes, it will leave remarkably little in the way of UK-owned businesses operating in this sector. In fact, Hanson now stands out like a sore thumb as being the last meaningful mouthful left on the plate for foreign suitors to gorge themselves on. The purpose of this blog isn’t to do share tips but if you’ve got some cash under the bed looking for a home…

What’s remarkable about the resting of control of virtually an entire strata of British industry is a) how quickly it’s happened and b) how little attention has been paid to it. To be fair, all of the foreign owners continue to operate out of the UK so in some ways the change of ownership doesn’t have a huge impact on the local scene. But can you imagine the fuss if a collection of French, Germans, Mexicans, Americans and Japanese were to buy up 95% of our farmland? In some ways I am in awe of just how relaxed our nation has become about these matters. Or maybe we are just the world’s tart: you can have anything you want, Dearie, if you pay the right price.

But the subject of this particular blog isn’t the UK Building Materials Sector. No, that’s just occupied the first 265 words of this discourse. The subject is its cousin, the UK Housebuilding Sector. Partly because it makes an interesting contrast with the Building Materials Sector and partly because it too is subject to a takeover bid or two.

The first thing to note in this compare and contrast exercise is that there are no foreign owners in the housebuilding sector. None. There was one, the American Centex Corporation, which purchased the medium-sized Fairclough Homes and ran it for several years. But this year, Centex has off-loaded Fairclough to the privately owned Miller Group. They are Scottish, but that doesn’t actually rank as foreign. What the sector consists of, from the stock market’s angle, is around 15 quoted housebuilders. There are another dozen privately owned ones, which operate at a slightly smaller scale to the quoted ones. This combined grouping builds around 70% of all the new houses in Britain. Over the past six or seven years, there has been a lot of merging and taking-over in this sector but it’s all been carried out by the local hoodlums. No out-of-towners.

Why should housebuilding remain such a local activity?

The UK housebuilding scene is unique. Nowhere else do so few companies control so much of the market. Only the USA has anything remotely resembling the UK housebuilding scene — i.e. giant housebuilding companies — and, over there, it’s fragmented and regionalised. Elsewhere, housebuilding businesses are involved in certain large schemes, like urban regeneration, but they don’t do mass-produced housing for sale across their countries. Not the way we do. So I guess this explains the first part of the conundrum: there simply aren’t any equivalent businesses lurking around elsewhere that could sensibly gobble up a UK housebuilder or two. As I say, only in the USA is the scene remotely similar and the cross-border activity – both ways – is virtually restricted to UK-USA business. So whilst St Gobain or Nippon Glass feel entirely comfortable digesting a similar business to theirs based in Britain, they would feel distinctly queasy about buying a large housebuilding business because they have no frame of reference with which to judge it, let alone the skills required to manage it.

Therefore UK housebuilders have a protective shield wrapped around them by virtue of their uniqueness.

But there is more to it than uniqueness. There is also a weird and wondrous understanding between national housebuilders and the UK government, based around the use and abuse of the planning system. The problem here, at least as far as outside businesses are concerned, is that the UK housebuilding industry works hand-in-glove with government regarding allocation of land and that this relationship means that there isn’t really a free market here to be exploited. If you like, it’s a boys’ club and entry to it is more or less determined by who you know, and success is determined by how well you play your hand of cards, not by any innovative strategies or unique selling points. It’s a very difficult market in which to gain any competitive advantage and consequently it’s hard for consumers to know or identify with any individual companies. Brand loyalty is virtually non-existent. A foreign buyer would immediately risk loosing the all-important contacts that make these businesses tick-over and would find it very difficult to add value in any way.

Now historically, the less a housebuilder has actually got involved in the building process, the better they have done out of it. What they have been good at is doing land deals: everything on downstream from that has just been a hassle to turn the deals into cash, three or five years down the line. None of them has been particularly interested in the process by which they deliver homes to their customers and consequently design flair has been largely absent and construction standards have been, shall we say, unchallenging.

You’d have thought that with a captive market and little meaningful competition, the way would be open for young-Turk housebuilders to appear on the scene and blow the opposition away. Five years ago, three quoted housebuilders broke ranks with the status quo and decided that they would like to try something different. They began to experiment with actually making houses themselves in factories rather than just subbing out the whole process to the boys on site, in the time honoured way. We are really only talking about switching to in-house timber frame here, not exactly cutting-edge technology, but for a housebuilder to actually build houses was something novel.

So what happened to them?

The first on the block was a housebuilder called Beazer. They’d had a small timber frame operation in Scotland since 1993 and they decided they would start a larger one up in England to service a big chunk of their output. However, no sooner had they bought and tooled up their plant in Ipswich than they were taken over by Persimmon, run by the ex-rugby player and brick-and-block lover John White. End of experiment.

The second one up was Wilson Connolly or Wilcon, as they preferred to be known. Wilcon had big ideas, not just for off-site construction but for an entirely vertically integrated supply route with materials arriving pre-packaged in containers for quick on-site assembly. They spent £3million on a software package to run all this and set up a subsidiary called buildpack.com with the express intention of bypassing the merchants. Their plan was to have 90% of output built off-site by 2004. Results? Disaster. Teething troubles meant that quality control actually went down and margins took a hit. In 2001, a boom year for housebuilders, Wilcon were the only one to report a decline in profits. The board acted: the group MD John Tutte and Mr Innovation, John Weir, were ousted and an old hand took over, pledging to get back to the traditional methods of working. But it was too late for Wilcon. They were taken over by Taywood in 2003.

And the third? Westbury took a more cautious approach but still ended up building the biggest timber frame plant in Europe, Space4 at Castle Bromwich, just off the M6. They never planned to build more than a “large proportion” of Westbury homes at Space4 and in many ways their intentions were the least ambitious of the three. Nevertheless, Westbury’s margins began to suffer in comparison with the competition and this week, Westbury has become a bid target from none other Persimmon (again). If Persimmon wins Westbury, they will become the largest housebuilder in the UK and the fate of off-site construction in the private housebuilding arena will be effectively sealed for another generation because it seems unlikely that Persimmon will persist with the Space4 concept.

There is an old adage in housebuilding circles that less is more. The less you get involved in the building process, the more money you make. The conservatives in this business — and there are many — are secretly delighted that these builders with ideas have all been vanquished. It means that they can go back to the life they knew, of doing deals with landowners and planners, well away from the public gaze, and that they won’t really have to think too hard or get their hands dirty. It also effectively inoculates the entire industry against foreign competition because it’s returned to the gentlemens' club ethic where it’s hard to bring about significant changes, let alone improvements.

It also partly explains just why the UK housebuilding scene is so technologically backward in comparison with other similar cultures. Off-site construction has been shown to work well: the Scandinavians are masters at it, the Germans increasingly good and the Japanese, as you might expect, have taken it to a new level. It’s even widely used in Britain in the commercial sector. But there is this huge inertia just to leave things as they are in private housebuilding. For the reality is that the money is made on the land deals and the planning gains and that, whilst off-site construction can deliver houses quicker, it doesn’t actually make them any cheaper and UK housebuilders don’t really want quicker homes. They just want a steady drip feed of new houses coming onto the market so that they can sell them at premium prices to buyers who have little choice available to them.

As they say, less is more.

3 Comments:

Anonymous Anonymous said...

Thankyou Mark, that explains why the UK building industry is so technically backward. Do you have an explanation for their abysmal quality and standard of service?

5:00 pm  
Anonymous Nautical Condominiums said...

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