The housing market is facing a number of headwinds that could blow some big housebuilders off course. After years of house price growth and buoyant housing sales, we're seeing a slowing rate in traditional housebuilder plot sales as reservation rates continue to be down on prior years and sales become more difficult to convert.
Challenges for housebuilders in the traditional sales market
The uncertainty for housebuilders and traditional plot sales are compounded by external economic and market pressures which continue to increase the rental demand and drive down traditional sales. The major external economic and market pressures appear to be:
Home ownership affordability
A combination of the following factors have made it more expensive and difficult for people to afford to buy and run their own homes:
High interest rates for mortgages
Anyone that already owns a home and is not in a long-term fixed mortgage deal will see increased monthly mortgage payments due to the increase in interest rates.
Anyone looking to buy a home will face higher affordability criteria.
It is also worth noting that various home ownership assistance and incentives, such as Help to Buy, are also ending. This means that people who could have previously bought with the assistance of these schemes may no longer be able to do so without them. Home ownership assistance schemes have been an immense help to housebuilder's sales rates in recent years and their withdrawal is likely to negatively impact traditional plot sales.
Flat or negative house price growth
Increased monthly mortgage payments and affordability criteria are further compounded by the fact that the home ownership market is no longer experiencing the healthy price growth that we have seen in the last few years.
The consensus on the outlook of house prices across the country appears to be little growth and more likely a modest fall in house prices in the short term.
Increase in build costs and home maintenance costs
The latest published figures for the BCIS General Building Cost Index show that in the second quarter of 2022 the index rose by 5.4% compared with the first quarter of 2022, and by 14% compared with the second quarter of 2021. The latest BCIS forecast believes that costs will rise by 16% over the forecast period (2Q-2022 to 2Q-2027).
The rise in build costs, coupled with a number of the above factors, has slowed the output and construction of new homes for sale and reduced the supply and availability of new more energy efficient homes for sale. Increased construction costs are also making developments riskier and less attractive for housebuilders.
Exit of buy to let investors
Individual buy to let investors appear to be exiting the market due to economic factors such as affordability and cost of property ownership. The trend is also being driven by a number of changes in tax and regulations, making it less attractive to own one or more properties as a traditional buy to let investor, such as:
- Loss of tax reliefs on rental incomes
- SDLT Surcharges on additional property ownership
- Increased regulatory requirements:
- EPC targets
- Building safety
- Rent reforms
- Right to rent checks
Rental stock is a crucial part of the housing market with current estimates suggesting there are five million private renters across the country. Given the affordability of home ownership, it is possible that more people will be looking to rent as their preferred housing solution. Therefore, with a challenging market for the average buy to let investor, it could be the growing Single Family Rental market (also known as 'Suburban Build to Rent') that leads the way.
Why are Single Family Rental investors and housebuilders a perfect match?
Housebuilders could navigate the challenges in the traditional sales market by partnering with Single Family Rental investors. There are clear benefits for housebuilders, such as:
- Most Single Family Housing (SFH) deals have at least some forward funding elements, which assists with cash flow for housebuilders and helps de-risk developments in a difficult and changing market.
- Selling in bulk to SFH investors also helps boost housebuilder sales rates.
- The rental properties are not usually competing directly against the traditional plot sales within a development. This allows the developer to build out a development at a quicker pace, as they will not be over flooding the traditional for sale market in that locality.
- SFH investors strive to let units as quickly as possible and achieve high occupancy rates which can assist housebuilders by:
- Having an additional partner (the SFH investor) to help market and advertise a development that they have invested in. The marketing is also helped by some of the technology adopted by SFH investors, such as self-guided tours.
- Creating a buzz around a development by having people living in the completed homes as soon as possible.
There is an obvious demand for quality housing that is professionally run and embraces innovative technologies to make things better for renters. In response to this, we're seeing a number of our SFH investor clients and other large institutional investors in the market looking to partner with housebuilders to increase the delivery of suburban rental stock.
Many SFH investors are focusing on customer service to distinguish their offering from a typical Buy to Let investor. Their aim is to provide an affordable alternative to owning a quality home without having to spend years saving for a deposit to buy. They strive to make the renter feel looked after and to take away some of the stress and pressure of home ownership, for example by dealing with the property maintenance.
The Single Family Rental market is also embracing technology – such as self-guided tours of vacant properties, leak detection as well as other energy efficient technologies in relation to reducing energy consumption – to ensure the delivery of a quality product and customer service.
Although in relatively early stages in the UK, the Single Family Rental market is growing quickly and 2023 is expected to be another year of substantial growth. Housebuilders should consider partnering with Single Family Rental Investors - it may just be the perfect match.
Get in touch
For further information on the Single Family Rental market and specialist sector insight, or if you have any questions regarding the advice and services that the WBD Real Estate team can provide - please do get in touch or visit the Real Estate page on our website.