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5 April 2019


While Brexit dominates the headlines, housing continues to be high on the political agenda and is likely to remain the subject of policy making and political manifestos long after the Brexit impasse has been resolved.

The structural under supply of new homes in the UK has been exacerbated by the decline in number and output of small to medium sized housebuilders (‘SME’). These entities often have limited access to equity finance and Barwood Capital believes that, by investing in partnership with them, attractive investor returns can be realised.


Residential Market Overview

The current market fundamentals are generally supportive of a positive housing market; interest rates, inflation and unemployment are low and, although subdued, GDP is expected to expand in 2019. Nonetheless it is clear that Brexit uncertainties are influencing sentiment and consumer confidence. Buyers are being cautious, delaying purchases and, where possible, taking advantage of incentives. This caused house prices nationally to fall month on month by 0.1% in February 2019[1]. That said, the underlying signs are encouraging because the number of property transactions and the number of mortgage approvals have remained stable. Indeed, although value growth has slowed, prices across the UK increased by 1.5% in the year to January 2019.

HMRC figures show that completed transactions increased in February 2019 – both month on month and year on year. In the mortgage markets, despite the 0.25% increase in the base rate during 2018, the average new lending mortgage rate only ended the year 15bps higher than it started, indicating robust competition amongst lenders[2]. UK Finance data shows mortgage approvals for home buyers were up 1.5% in the year to January 2019 and the longer-term fixed interest rates hardly moved at all, reflecting market expectations that future base rate rises will be limited and gradual.

House Price Forecasts

Given the current political and economic landscape, it is difficult to predict how house prices will move over the next five years, but most analysts expect there to be growth over the medium and longer term. The graph below[3] shows that house prices grew in most regions in 2018, except London where values fell. Elsewhere prices should increase in 2019, albeit at a slower rate than the year before. Prices in the Midlands and Yorkshire should grow by 3% and 2.5% respectively in 2019, while values in the South East will remain flat.


Looking forward, house prices in all regions (apart from London) are expected to increase in 2020 and compounded annual growth is expected to be 14.8%[4] nationally over the next five years. The projected long term house price growth in the UK is being fuelled by an increasing population, smaller households and the structural undersupply of homes.

Whilst the number of net additions to new homes in England has risen over the last five years, the supply needs to rise by a further 36.5%[5] per year to reach the Government’s target of 300,000 annual net additions.

What is the cause of the under supply of new homes?

Many factors contribute to the under supply of new housing, one of which is the decline in the number and output of SME housebuilders.

The late 1980s saw a spike in new home development with almost 250,000[6] housing completions that year. In 2017-18 around 220,000 homes were created – an 8% decrease[7]. It is no coincidence that this late 1980’s peak occurred at a time when SME housebuilders were flourishing in a more dynamic and entrepreneurial market, building almost 60% of all new homes[8]. Since then SME output has fallen sharply and with it new housing numbers have fallen too. Pre 1990, SMEs built 40% of all new build stock, by 1995 they contributed 25% and now they are constructing just 12% of all new build homes[9].

There are two main reasons for SMEs’ decline. The first is that they are less equipped than volume housebuilders to deal with the costly and bureaucratic planning system. The second (and most crucial) reason is the difficulty SMEs have sourcing finance.

Why do SMEs matter?

Reversing the decline in SME housebuilders matters, not just because it would boost housing supply, but because it would “bring major benefits for the long-term health of the sector and for the economic vitality of towns and cities around the country” [10]. It would also make the industry more competitive, quicken delivery rates and improve the quality of homes.

Up to 70% of new housing in the UK is now built by a small number of large firms[11] who build a homogenous product which the market is slow to absorb. If there were more choice, sales rates (and therefore construction rates) would improve, which would increase the number of homes delivered each year.

SMEs focus on and build smaller sites (usually those with capacity for below 50 dwellings), which tend to be too small for the national housebuilders but cumulatively have huge potential when it comes to meeting the demand for new homes. These sites can be delivered faster because they often do not have to invest in the significant infrastructure required to open most larger sites.

SMEs also usually have more skilled and experienced teams which enable them to deliver higher quality homes. This should also enable them to mitigate the impact of any labour supply issues from overseas that might be caused by the ongoing Brexit negotiations.

Opportunity for Investors

Barwood Capital believes that strong investment returns can be generated by investing into residential development sites via joint venture partnerships with SME developers.

The main barrier to entry for SMEs is their ability to access equity and Barwood Capital is well placed to provide equity to those with strong track records. We generate many opportunities so we can be particularly selective about those we choose to pursue.

Our strategy is to undertake development opportunities in desirable locations that will typically deliver 3 to 5 bedroom homes. These projects will predominantly aim to attract second time buyers and down sizers (rather than first time buyers) who have higher equity availability and are less impacted by the general economic climate and interest rate fluctuations.

Whilst the uncertainty surrounding Brexit is undoubtedly making buyers delay purchases, we believe that the prospects for a stable housing market are sound and will be driven by excess demand, particularly in the Midlands, Yorkshire and the South East. We target family homes in carefully selected locations outside central London which benefit from sustained levels of demand. As a result, they should have a greater degree of protection in the event of price fluctuations on a macro level.

SME numbers have fallen but there are still plenty of established operators actively seeking equity to acquire and build out consented sites. There is little doubt that supporting SME developers is crucial to the long term health of the sector but an increasing Government awareness and a policy shift that seems to be moving in their favour mean that there are also opportunities to generate target returns in the right way.

Barwood Capital has a strong track record in residential development with 217 dwellings being delivered or in the pipeline. The combined gross development value of these schemes is in excess of £100m. The Barwood Residential Investment Platform was established in the summer of 2018 to give investors the ability to easily invest in a spread of residential development projects. Since the Platform was created, we have committed to six development projects comprising a total of 60 dwellings, with a gross development value of almost £30m. These sites will be built in partnership with four of our established regional development partners.

Registering on the Barwood Platform is straightforward and gives the investor the opportunity (but with no obligation) to repeatedly invest, via a single email, into a geographical spread of projects. Each pound invested will go into at least three schemes and typically across 40 to 50 homes.

If you would like to find out more about the Barwood Residential Investment Platform and the target returns it offers, please click here to register your interest.

[1] Natwest Residential Bulletin, February 2019 [2] Natwest Residential Bulletin, February 2019 [3] Savills 5 Year Forecast (Nov 2018) and Land Registry. * denotes actual house price growth Jan 18 – Jan 19.[4] Savills 5 Year Forecast, November 2018 [5] Ministry of Housing, Government and Local Communities [6] ONS. [7] Ministry of Housing, Government and Local Communities [8] PBC, March 2016 [9] Home Builders Federation: Reversing the decline of small housebuilders January 2017 [10] Home Builders Federation: Reversing the decline of small housebuilders January 2017 [11] Shelter and KPMG (2015), Building the homes we need: a programme for the 2015 government