Housebuilders in the UK have had a terrible few years
Can they be saved by Prime Minister Andy Burnham's promises to build more homes?
According to Jo Rands, a portfolio manager on the UK Equity Income, UK Managers' Focus, and UK Rising Dividends strategies at ClearBridge Investment, the last few years have been extremely difficult for UK homebuilders and their shareholders. The government has promised to construct 1.5 million homes in five years, but over the past two years, a number of obstacles, such as rising costs and interest rates, have caused UK housebuilders' stock to fall. But now that Andy Burnham has entered No. 10 Their shares have recently increased due to discussions about constructing additional council houses and even reviving a version of Help to Buy. Will this go on?
Why are home builders in the UK having difficulties?
The fundamental problem with the housing crisis in Britain is that there isn't enough housing being built, either in the public or private sectors. According to David Crosthwaite, chief economist at the Building Cost Information Service, the number of completed homes reached a peak of almost 400,000 in 1970, with less than half of those being council houses. Half a century later, only 200,000 new homes were constructed last year, with only 4,000 of those being council housing. In essence, "at a time when the population is continuing to grow at a strong rate, you have a diminishing supply of housing, particularly social housing."
It should come as no surprise that there is a massive backlog due to the disparity between population growth and housebuilding. According to Edward Clarke, an associate director at the planning consultancy Lichfields UK, there are multiple methods for estimating this unmet demand. "We really need to build two million more homes" when you consider what statisticians refer to as "concealed households"those who would like to start a family but are currently "sofa surfing" or living with their parents and friends. Although that figure may seem startlingly high, Clarke believes it might even be an underestimate. It would be necessary to build an additional 2.4 million homes in order to bring the housing-to-population ratio into line with continental Europe.
Young people and those on the periphery are not the only ones who suffer as a result. According to Jeremy Matallah, co-founder of the rent-to-own company Keyzy, the lack of supply makes homes in the UK less affordable in terms of the ratio of prices to incomes than they are in nations like France and Germany. "We should be building around 300,000 homes a year"roughly a 50% increase from the 200,000 homes we are currently building annuallyjust to meet the market's immediate demands.
Restrictive planning regulations and land hoarding.
The majority of experts concur that the planning system is a major contributing factor to the shortage. According to Paul Smith, managing director of The Strategic Land Group, the Competition and Markets Authority, the competition regulator, was asked to look into claims that developers and builders were hoarding land excessively in 2024. Even though this was outside of its original purview, it felt compelled to discuss it because it discovered that the land market was not functioning properly and that the planning system was such a fundamental barrier to the delivery of new houses.
According to Smiths, there are two primary ways in which the planning system impedes development. First of all, only one-third of English councils bother to have current local plans, and there is just not enough land set aside for development. Even worse, the procedure for handling individual planning applications, which is meant to serve as a "safety valve" in light of the absence of local plans, is becoming more complicated and too subjective, making it unpredictable.
Due to a lack of town planners, even when decisions are made, the process is becoming slower and slower. According to Smith, "applications for new homes take more than three times longer to be approved than they did a decade ago, with the median time around 349 days". This is important because even submitting a planning application can be costly for a developer, costing between £150,000 and £200,000, even if the application is rejected. "More developers would be willing to take the chance if the procedure were expedited and the results were more predictable."
The planning system is ineffective due to the abundance of rules and regulations. For instance, Section 106 agreements, which require builders to contribute to additional infrastructure related to development, have been in place for decades. However, Smith notes that the scope of these agreements has expanded to the point where local police departments are now requesting contributions from developers in order to purchase more laptops. Carbon emission regulations under the Future Homes Standard "typically add around 7,000 to 8,000 per home in extra building costs."
Particularly controversial is the Building Safety Act, which was passed in 2022 and greatly raised the safety standards for tower blocks. Adam Murray, CEO of planning and development consultancy Urbana, says that while the legislation "feels like a bit of a sledgehammer to crack a nut, reducing the appetite that anybody has to actually build flats," the goal of preventing a repeat of the Grenfell Tower tragedy is understandable. According to William Reeve, CEO of the real estate technology company Goodlord, developers in the US and Germany can construct premium tower blocks "without having to follow rules such as having to have two staircases." If we are to avoid becoming entirely dependent on single-family homes, it is imperative that these regulations be loosened.
The fence around the remnants of the residential tower block Grenfell Tower in west London has tributes on it.
A deluge of additional issues for UK home builders.
Inadequate planning regulations are not the only obstacle to home construction. According to Matt Beckley, partnerships director at Keon Homes, purchasing land can be challenging when a site is owned by several parties, even if development is permitted. It can be costly to clean up former industrial land so that it is suitable for residential use. According to Beckley, "there needs to be a good, hard look at the amount of funding that's available and how that is financed" despite the fact that the government offers some grants as support.
According to James Anderson, a construction supply-chain specialist at Catnic, homebuilders are also "contending with a notable skills shortage, which means builds are taking longer to complete and projects are stalling." Even before accounting for workers quitting the industry, the National Audit Office has calculated that up to 755,000 workers are required to help meet housebuilding targets. Catnic and the industry as a whole are offering training, but more assistance will be needed.
According to David Smith, portfolio manager for Henderson High Income Trust, the demand side is also an issue. Consumer sentiment has been negatively impacted by high mortgage rates and political unpredictability surrounding tax matters, resulting in a "lacklustre number of transactions." According to Ronnie George of Volution, higher borrowing costs and inflation are also having a detrimental effect. He thinks Help to Buy-style subsidies for homebuyers would be beneficial.
The challenge of Andy Burnham.
Andy Burnham, the new prime minister, obviously has a big task ahead of him. However, given his performance as Greater Manchester's mayor from 2017 to 2026, many are hopeful that he can actually make a difference. According to Smith, his accomplishments during that time in office were far from flawless, and he ultimately had to make some concessions to those who opposed greenbelt development because he failed to meet the lofty housebuilding goals he set for himself. However, instead of simply "kicking the can down the road" as local leaders in other regions of the nation did, he should be commended for going out and developing his own plan for local development.
In this photo, Andy Burnham is seen leaving his house and advocating for a land value tax.
Burnham at least demonstrated an "understanding of the problem and a willingness to try and address it" while serving as mayor of Manchester, according to Matallah, who is impressed by Burnham's pledge to address the "structural undersupply of social housing for the past 40 years" in addition to the current commitment to invest 39 billion over ten years in affordable housing. There are signs that Burnham might be open to letting councils use public lands for development, retain a larger portion of the money they receive from the sale of council houses, and even take on debt in order to construct more homes.
According to Terry Woodley, managing director of development finance at Shawbrook, Burnham's "Manchesterism"the idea that "devolving power to give mayors and councils the power and resources to make decisions" can boost growthmay be effective. "Of course, there needs to be some sort of national strategy put in place, with regular monitoring to make sure that the councils are using these powers to boost development," but Burnham's excitement and decentralization offer "the best chance to boost housebuilding levels that we have seen in over a decade."
According to Clarke, Burnham isn't exactly starting from scratch. In order to achieve their goals of constructing 1.5 million homes in five years, the Starmer administration has worked hard over the past two years to reform the system. This was articulated in their proposed National Planning Policy Framework (NPPF) reform, a draft of which was distributed in December of last year (with additional revisions in May). The new NPPF pushes councils to allow development in the "greybelt," or lower-quality greenbelt sites, in an effort to free up more sites and make the process more predictable and rule-based. In a number of areas, the NPPF has also increased the overall goals for home construction.
Indications that the homebuilding industry is growing.
Many in the industry are already beginning to feel more optimistic about the likelihood that more homes will be constructed. According to Smith, "you've always got to be optimistic in this game," and the government can remove "the grit from the system" through a number of "easy wins." Smith is especially pleased that housing and planning minister Matthew Pennycook has been retained and promoted to a Cabinet position.
According to Bleckley, "we have finally moved away from a situation where there wasn't a proper housing minister and if there was, they were moved on every 12 months." "Like there is now a will to get more houses built than there has been for more than ten years" is how it seems. Although Bleckley hopes he is mistaken, this does not imply that the government will meet its goals for housebuilding over the next five years, but "I do think that there will definitely be an uptick."
Although there are "many uncertainties," according to Clarke, the number of planning submissions has recently increased, which is a good predictor of future activity. "If the market conditions allow for it, we should expect to see more homes being built." Similarly, Woodley is beginning to notice that "some of the developers that we work with are getting approvals" more quickly, despite his worries about the lack of planners.
The market for new homes could be about to change.
According to Jack Fletcher-Price, an equity analyst for Morningstar, the market may now be too pessimistic about the housebuilders, but until something happens to change investors' opinions, things are unlikely to get better. Things could drastically change if (or when) such a catalyst emerges. Every time there is a rumor that the government will reinstate a Help-to-Buy program, for example, shares of homebuilders soar, sometimes by as much as 5 percent in a single day.
According to Guiseppe Scozzaro, a partner with chartered accountants and business advisors Goodman Jones, "they tend to have stronger balance sheets, established land banks and greater access to funding, allowing them to respond more quickly if market conditions improve," the large housebuilding companies will be in the best position to benefit from an increase in the industry."much broader range of firms, from planning consultants and specialist lenders, to building-materials suppliers and infrastructure providers" would profit from any increase. Here, we examine a few of the most promising investment concepts.
The Persimmon logo flies close to recently built homes while perched on a green banner.
The most promising real estate investments available right now.
Persimmon is among the most appealing home builders (LSE: PSN). In contrast to London and the southeast, its comparatively high exposure to the north of England "was previously seen as a negative, but it is now viewed as a positive, as you're seeing much better house-price growth up there," according to Jack Fletcher-Price of Morningstar. The company is "one of the most vertically integrated UK housebuilders, with in-house brick, tile, and timber-frame manufacturing operations, helping to improve cost control, efficiency and security of supply," according to David Smith of Henderson High Income. Persimmon has a 5.8% yield and is trading at 11 times 2027 earnings.
You may want to consider Barratt Redrow (LSE: BTRW) if finding a deal is your top priority. According to Fletcher-Price, it is even less expensive than Persimmon in terms of its fundamentals, even though he believes Persimmon has a more appealing business. The stock is currently trading at slightly over half of its book value, which is the sum of its net assets. Barratt, which is trading at 12 times 2027 earnings and has an alluring yield of 3.97 percent, also seems inexpensive by other measures.
Vistry (LSE: VTY), which is trading at an even higher discount of more than 70% to its book value and at just 6.4 times its 2027 earnings after a string of scandals involving understated costs and subpar results, is even more of a deal if you're willing to take on a little more risk. According to Jo Rands of ClearBridge, the company has a distinctive model. It "could possibly do well from a greater emphasis on affordable housing" because it collaborates with local authorities on projects (though Rands emphasizes that she doesn't have a general opinion of the company).
According to Smith, if housing output rises, companies that deal with drainage, piping, insulation, heating systems, and other construction inputs may also see increased demand. Genuit (LSE: GEN), which offers ventilation, climate, and water systems for buildings, is one promising play on that theme. With revenue increasing by a third and profits doubling between 2020 and 2025, the company has experienced strong growth. In spite of this, the stock is trading at a dividend yield of 4.9 percent and less than ten times 2027 earnings. Volution (LSE: FAN) is a ventilation systems specialist. Its growth record is even more impressive than Genuit's.
Over the five years leading up to 2025, the company has nearly doubled its revenues and tripled its profits thanks to a number of acquisitions. Ronnie George, the company's chief executive, believes that increased demand for its systems will result from increased awareness of the significance of adequate ventilation, particularly in light of the Covid pandemic and a number of tragic cases where people have died from asthma brought on by mold. Previously, the majority of its revenue came from retrofitting old buildings, but now about half comes from new construction. Volution has a 2.1 percent dividend yield and trades at 15.8 times 2027 earnings.
Ibstock (LSE: IBST), a manufacturer of concrete and bricks for the UK construction sector, is another business that should benefit from any increase in home construction in the country. Although revenue has fluctuated since 2020, the long-term trend is upward, and over the coming years, both sales and profits should continue to rise. With the completion of two new brick factories, revenue growth should continue. Ibstock has a dividend yield of 2.8 percent and is trading at 16.4 times projected 2027 earnings.
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