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In the days immediately following the election of the Labour government, major housebuilders were pulled into Downing Street by the chancellor, Rachel Reeves, alongside utility firms and infrastructure contractors, to be told of the new government鈥檚 ambitions for the sector. Labour wants to see 1.5 million homes built across the parliament 鈥� implying an average annual build rate of 300,000, a number that hasn鈥檛 been hit even once in over 50 years.

Such is the ambition, housing quango Homes England is 鈥減ushing very hard鈥� for partnerships housebuilder Vistry to build 30,000-40,000 units per year, according to Greg Fitzgerald, executive chair of Vistry. If delivered, that would be twice the volume that any UK housebuilder has previously reached.

In this context, it is perhaps no surprise that Barratt chief executive David Thomas has been stating that he believes the merger with Redrow 鈥� which has just got final regulatory clearance 鈥� is about accelerating growth. He said at Barratt鈥檚 results this month that the 拢2.5bn merger with Redrow will 鈥渉elp us to address the country鈥檚 housing shortage鈥� by 鈥渁ccelerating delivery鈥� more quickly together than each of the firms could have on their own. This will happen, he said, by allowing Barratt to 鈥渋mprove asset turn鈥� 鈥� City speak for building out sites more quickly.

Bellway鈥檚 abortive purchase of Crest Nicholson, abandoned during due diligence over the summer, plus indicates the likelihood of a wave of consolidation in the sector beyond Barratt and Redrow 鈥� meaning the impact of big firms getting bigger could be significant.

The problem is that history suggests housebuilder consolidation does not deliver unit expansion. Analysts suggest that the usual outcome in terms of homes delivery is either no difference or a small reduction in supply. And either way, Barratt on its own reduced its output sharply in the year to June and is forecast to reduce output again in the current period. Is there any reason to suspect that Barratt and Redrow will be able to break the mould and actually use their tie-up to increase housebuilding supply?

Difficult to believe

The last six months in the housebuilding market have been dominated by talk of mergers and acquisitions, ever since Barratt and Redrow announced in February they had agreed terms on a tie-up. With both the market and political fundamentals improving after two years of hard grind for the sector post-Truss, potential deals are on the cards at prices that look to be tempting for both buyers and sellers (see The case for mergers panel).

Bellway looked set to be taking on the troubled listed player Crest Nicholson for much of the summer before cancelling the 拢702m purchase in August prior to making a formal offer, with analysts concluding that it felt the risks of the deal were too high.

It鈥檚 very difficult to see how a merger like this is going to end up producing more homes

Christine Whitehead, London School of Economics

Meanwhile, fast-growing private equity-backed housebuilder Avant Homes has been linked with potential purchases of both Crest and Cala Homes (the latter of which was sold last week to separate investors).

Some, however, argue that the sector is already quite concentrated enough, with the 12 largest firms, including the eight major listed players, producing almost 95,000 houses in 2023, close to half of all UK supply. The last government commissioned the competition regulator to look into the sector, with former housing secretary Michael Gove at one point voicing fears that big builders were a 鈥渃artel鈥� blocking progress on supply 鈥� albeit the regulator鈥檚 study ultimately found little evidence of anti-competitive practices.

Despite this finding, some caution that further market concentration, by reducing competition further, would tend to see the industry build less overall. Christine Whitehead, emeritus professor of housing economics at the London School of Economics, believes the 鈥渟tructure of the industry鈥� is already 鈥渧ery worrying鈥� in terms of its concentration. 鈥淚t鈥檚 very difficult to see how a merger like this is going to end up producing more homes,鈥� she says. 鈥淚t鈥檚 very difficult to believe because there isn鈥檛 going to be the competition [that there was]. They don鈥檛 have as much of an incentive to build out.鈥�

The Barratt-Redrow deal comes over 15 years after the last major wave of consolidation, which saw Barratt take over Wilson Bowden, and George Wimpey merge with Taylor Woodrow. Alastair Stewart, research analyst at Progressive Research, says: 鈥淚n the past it has always seemed to be with housebuilders that, in terms of volume, one plus one made slightly less than two.鈥�

However, Stewart adds: 鈥淣ow Barratt seems to be saying it can add one and one and get more than two, albeit not massively. In theory, what they鈥檙e saying does allow this to work.鈥�

Double sales rate

Barratt鈥檚 David Thomas laid out his strategy for achieving this at the firm鈥檚 recent results call, saying the industry faced the 鈥渃hallenge in accelerating delivery and restoring asset turn against the backdrop of the lower reservation rates we鈥檝e seen since the autumn of 2022.鈥� His point being, that if home buyers around any given site are only buying at a rate of two or three homes per month, given elevated interest rates, it is very difficult for a developer to build at a speed that outpaces those sales without totally destroying any sales margin.

More choice of homes stimulates more buyer demand. If you鈥檝e got a housebuilder choosing to use multiple branding on a site, then that should be positive for accelerating delivery

Jan Crosby, Savills Capital Advisors

But with Redrow selling its homes to more upmarket buyers than does Barratt, Thomas鈥檚 proposition is that the acquisition allows it to sell an entirely different product on the same site alongside the Barratt homes (and potentially also David Wilson homes, a mid-market brand Barratt also owns).

The claim is that this ability to 鈥渄ual-brand鈥� or even 鈥渢riple-brand鈥� sites means they can appeal to multiple distinct buyer markets simultaneously, which can massively increase the rate of sale and build-out on a site. Thomas cited one site, called Grey Towers Village, in Nunthorpe, Middlesbrough, as an example of what might be possible post-merger. He said completions rose by 110% and the sales rate doubled after the firm introduced Barratt-David Wilson dual-branding.

鈥淲e鈥檝e seen, through David Wilson and Barratt, that applying a multi-brand strategy drives the ability to have more sales outlets, unlock a greater number of home completions, make our landbank more efficient, and ultimately improve asset turn,鈥� said Thomas. This strategy accords with the logic of the Independent Review of Build Out by former MP Oliver Letwin, which argued that by improving the diversity of types and tenures of homes on large sites, the rate of delivery of housing could be improved. 鈥淲e鈥檙e excited about what three brands might do 鈥� particularly our ability to accelerate sales outlet openings,鈥� said Thomas.

Paul Smith, managing director of promoter Strategic Land Group (SLG), agrees the strategy has potential. 鈥淭his makes it much easier to double-head sites,鈥� he says. 鈥淪o yes, you can deliver much more quickly. There could be a spike in delivery.鈥� Jan Crosby, director at Savills Capital Advisors, says: 鈥淢ore choice of homes stimulates more buyer demand. If you鈥檝e got a housebuilder choosing to use multiple branding on a site, then that should be positive for accelerating delivery.鈥�

However, Barratt is not currently able to put any numbers on how significantly the merger is expected to increase supply by, as it is barred from putting any forecasts out while it is still awaiting regulatory approval for its combination. But evidently it will be going some distance backwards before it can go forwards. As Barratt alone, its build supply of 14,000 homes was already 3,000 homes short this year on the year before, and the firm has said this could fall by as much as another 1,000 homes next year, given its decision to stop investing in new land over the last couple of years. This means that even with the contribution of somewhere around 4,500 homes from Redrow, the combined business is likely to start life only very barely bigger than standalone Barratt was in 2022.

Tram lines

There are other rationales for why the combined firm could be able to accelerate. Barratt has said the merger will allow it to find 拢90m in 鈥渟ynergy鈥� savings, including 拢34m from more efficient procurement, and 拢33m from cutting duplication of offices, with the rest from back-office costs. This increased margin could allow greater investment in development. However, Yolande Barnes, chair of the Bartlett Real Estate Institute, says while this will give the combined firm 鈥済reater financial firepower and greater bidding power鈥�, meaning it will face reduced competition for land, this does not necessarily translate into greater numbers. 鈥淚t鈥檚 good news for the individual company but it doesn鈥檛 touch supply in the rest of the market,鈥� she says.

The challenge has always been to maintain delivery post-merger. The tendency is that volumes peak immediately after and then drift down

Paul Smith, Strategic Land Group

Adrian Kearsey, managing director and research analyst at investment bank Panmure Liberum, says a historical analysis over the last half-century supports Barnes鈥� view. Private housebuilders, he says, have built a broadly consistent number of homes over that period, within a band of plus or minus 25%, throughout the various economic cycles. This is despite massive consolidation in the sector, which 30 years ago was dominated by SME firms. 鈥淧rivate sector completions are relatively consistent, dependent on the market,鈥� Kearsey says. 鈥淥ver the last 50 years there has been consolidation, but their overall activity hasn鈥檛 changed dramatically.

鈥淚f they haven鈥檛 stepped out of their tram lines previously, you have to ask, why would they now? If they build more, it destroys their margin.鈥�

Likewise, professor Noble Francis, economics director at the Construction Products Association, adds: 鈥淥n a general basis, the mergers don鈥檛 particularly have a significant impact on housing supply,鈥� arguing that factors such as planning constraints and demand are much more pertinent.

So, why do people think it unlikely Barratt can pull off its promise? SLG鈥檚 Paul Smith thinks that while dual-branding might initially work to increase output, this is hard to sustain. 鈥淭he challenge has always been to maintain delivery at that level post-merger. The tendency is that volumes peak immediately after and then drift down.鈥�

Cost-cutting

He argues one of the key issues is that by rationalising land-buying, merged firms tend to reduce their combined chances of winning a land bid 鈥� where before they may have been two out of five bidders, say, now they are one out of four. 鈥淵ou鈥檝e got to buy land, but your volume is constrained by the number of sites you can feed through,鈥� he says. 鈥淚t gets to the point there is limited competitive advantage in being bigger.鈥�

In addition, Andy Hill, chair of privately owned housebuilder and contractor Hill, says merged firms typically struggle to deliver on dual-branding strategies over time, as the desire to centralise and seek procurement savings acts to reduce any original brand distinctiveness. 鈥淩edrow has an absolutely superb range,鈥� he says. 鈥淏ut if you look 10 years into the future, will it still be as distinctive? Usually in mergers, one brand tends to dominate and the centre looks to cut costs.

鈥淚t鈥檚 not great news for the country in terms of unit numbers, or in terms of choice of product.鈥�

Most commentators view other factors as much more relevant than industry mergers if the government is to make significant inroads into its distant 300,000 homes-a-year target 鈥� with Capital Economics predicting net additions of new homes falling as low as 195,000 in the current year.

This implies the government looking at policy measures to boost demand, such as Help to Buy, and promoting other types and tenures of housing beyond traditional private homes for sale. UCL鈥檚 Barnes, for example, says: 鈥淚f you want to increase capacity you have to massively increase diversity of supply. You鈥檝e got to massively expand the players in the market. At the moment all our eggs are in the basket of one development model.鈥�

James Pargeter, senior adviser at build-to-rent housing specialist GAA, says: 鈥淗aving most of the volume tied up with a single large entity doesn鈥檛 seem entirely sensible given the variety of need in the country, and the need to meet that. A key component of expanding supply will be embracing a variety of tenures.鈥�

Hence the recent volume growth of partnerships provider Vistry, which prioritises building affordable homes and homes for private rental on its sites, over homes for sale. While Vistry might have taken a big knock to its value after revealing 拢115m of cost overruns on nine large projects, it has unarguably used this alternative business model to grow to an annual run-rate of 18,000 homes at the same time as the output of traditional volume builders has declined. 好色先生TV understands that Homes England has been privately putting pressure on other housebuilders to take on the Vistry business model. 鈥淔or there to be a step up,鈥� says Panmure Liberum鈥檚 Kearsey, 鈥渢he government will need to look at business models and look at the mix between social housing and private.

 

 

However, even with a multi-tenure strategy, expanding supply cannot be immediate. Savills鈥� Crosby says: 鈥淵ou can鈥檛 put an accelerator on a supertanker and expect it to be a speedboat. It will take time.鈥� A round of industry consolidation appears unlikely to get Labour any closer to its manifesto target.