Property & Construction Daily

The Property & Construction Daily provides a sector-specific comment from leading analyst Alastair Stewart. His daily perspective provides a round-up of market statements, news, economics and views from the property and construction sectors.

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February 26, 2024

HMSO; News – Competition watchdog investigating suspected anti-competitive conduct among housebuilders

Company news

Hammerson (HMSO, 26p, £1,301m)

UK and European retail property group. Disposal. Contract exchanged unconditionally for the sale of Union Square, a 52,000 sq m shopping centre in Aberdeen, to an affiliate of Lone Star Real Estate Fund VI for £111m in cash. Completion is expected to occur in Q1 (Mar) 24. This represents an 8% discount to 31 December book value of £121m and a net initial yield of 11%. The proceeds of this disposal will further strengthen the balance sheet and provide additional capacity for reinvestment into the core portfolio. The sale concludes the £500m non-core disposal programme, as part of Hammerson’s strategic re-alignment of its portfolio, as outlined at the start of 2022.

In other news …

Housebuilders. The Competition and Markets Authority has issued the final report into its industry-wide study into housing delivery and also a new investigation into suspected exchanges of competitively sensitive information among the eight largest housebuilders.

The CMA has today launched an investigation into suspected breaches of competition law by eight housebuilders and their group companies, relating to concerns that they may have exchanged competitively sensitive information. The groups are: Barratt Developments (BDEV); Bellway (BWY); The Berkeley Group (BKG); Bloor Homes (private); Persimmon (PSN); Redrow (RDW); Taylor Wimpey (TW.); Vistry Group (VTY). “The CMA has not reached a view as to whether there is sufficient evidence of an infringement or infringements of competition law for it to issue a statement of objections to any party under investigation. Not all cases result in the CMA issuing a statement of objections”.

In an accompanying document, the final report on the CMA’s 12-month Housebuilding market study, has been released, including the following summarised findings.

  1. Planning rules: planning systems in England, Scotland and Wales are producing unpredictable results and often take a protracted amount of time for builders to navigate before construction can start. The report highlights that many planning departments are under resourced, some do not have up to date local plans, and don’t have clear targets or strong incentives to deliver the numbers of homes needed in their area.
  2. Speculative private development: private developers produce houses at a rate at which they can be sold without needing to reduce their prices, rather than diversifying the types and numbers of homes they build to meet the needs of different communities.
  3. Land Banks: the practice of banking land was more a symptom of the issues identified with the complex planning system and speculative private development, rather than it being a primary reason for the shortage of new homes.
  4. Private estate management: 80% of new homes sold by the eleven biggest builders in 2021 – 22 are subject to estate management charges. These charges are often high and unclear to homeowners. Whilst the average charge was £350, one-off, unplanned charges for significant repair work can cost thousands of pounds and cause considerable stress to homeowners. The report highlights concerns that many homeowners are unable to switch estate management providers, receive inadequate information upfront, have to deal with unsatisfactory maintenance, and face unclear administration or management charges which can often make up 50% or more of the total bill.
  5. Quality: housebuilders don’t have strong incentives to compete on quality and consumers have unclear routes of redress. Analysis also suggests that a growing number of homeowners are reporting a higher number of snagging issues. The CMA recommends: requiring councils to adopt amenities on all new housing estates; enhanced consumer protections for homeowners on existing privately managed estates – including making it easier for homeowners to switch to more competitive management companies; establishing a New Homes Ombudsman as soon as possible and setting a single mandatory consumer code so homeowners can better pursue homebuilders over any quality issues they face.

Viewpoint: First, the 12-month study: the phrase ‘no way Sherlock’ (or similar) springs to mind. The main business model employed by most (but not all) of the biggest quoted housebuilders has evolved because it is most attractive to investors – just like the biggest supermarkets have evolved on the same basis. Other models are available in both industries; but in housebuilding, the Byzantine and glacial natures of the planning system (Government-led) has progressively excluded most alternative and innovative providers – thus the formation of a ‘super league’ of the top five. More affordable homes could be built (it would merely come off the land price, leading to less scope for builders without economies of scale to ‘sharpen their pencils); but the Cameron/Osborne government did more than most to weaken alternative tenures. Significantly, the CMA has concluded (in my view, what it already knew before the study was foisted on it) that the old chestnut of ‘land banking’ is not holding back delivery levels – again, down to government policy. Quality has definitely been a stain on the sector, but the large builders were addressing this before the study commenced. Estate management has generally been out-sourced and it seems reasonable to pursue best practice. As to the new investigation, the statement was short and hazy. Price fixing, the main outcome of anti-competitive behaviour in any market, was not referred to – and it is hard how this would ever be possible except perhaps at the fringes: prices are mainly set by mortgage lenders’ valuers, with reference to transactions in the roughly ten times larger secondhand market. The largest mortgage provider, Lloyds Banking Group has a market cap that is bigger than the total for the seven quoted companies being investigated – so it’s clear to see the balance of power does not lie with the developers. All in all, there is a suspicion of political pressure in both of today’s announcements.

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