We are delighted to share with you JLT Construction’s 2018 UK Housebuilder Risk Review, Homing In. In this report we bring together the industry concerns and risk mitigation strategies of the UK’s leading housebuilders. Through a close inspection of annual reports over the period 2017-2018, we have attempted to chart the changes in perceptions of risks impacting the UK housebuilding industry.
2018 could be considered a turning point for the levels of risk affecting the UK housebuilding industry. As recently as 2017 the sector’s shares outperformed the broader market by as much as 30 per cent. However, slower house-price growth and increased operating costs may mean that previously secure profit margins reduce over the short term.
With this in mind, JLT Construction has produced this white paper to shed light upon various risks impacting the UK’s leading housebuilders and the risk management strategies they employ. This is in order to explore how principal industry risks have developed over this period and the extent to which housebuilders have adapted their own risk mitigation strategies accordingly.
The top ten risks identified include health and safety, material and subcontractor availability, housing demand and mortgage availability. The most noticeable trend is the concern that UK housebuilders feel for the potential of emerging risks, such as cyber risk, to disrupt their operations.
We selected 14 of the largest housebuilders in the UK, by turnover, as candidates to survey; this number reflecting the availability of public information and reports available to us. We analysed our survey members’ annual reports from both 2017 and 2018 in order to measure the frequency with which housebuilders were citing different types of risk over the period.
By comparing the year-on-year change of risks mentioned by our survey members we explored the extent to which UK housebuilder perceptions of risk had shifted over our survey period. Our research also allowed us to investigate the way in which UK housebuilders have evolved their risk mitigation strategies in order to address the risks they believe to be the most impacting for their industry.
Below we summarise the key highlights from the report:
MATERIAL COST & SUBCONTRACTOR AVAILABILITY
If you cannot buy it and you cannot hire it then you cannot build it. Rising material costs and reduced subcontractor availability are just two developing risks in 2018 which have the potential to detrimentally affect UK housebuilders. How are the industry’s major players planning to mitigate these risks?
HOUSING DEMAND AND MORTGAGE AVAILABILITY
For the past few years, “benign” has proven a popular term among housebuilders describing the state of the UK housebuilding market. As we enter an increasingly unpredictable economic environment, is it time to ask how UK housebuilders can continue to ensure that customers get a foot on the property ladder?
HEALTH & SAFETY
Health and safety is no small matter to those involved in an accident. What’s more, any health and safety incident has the potential to escalate into lengthy legal proceedings, financial penalties, reputational damage and delay to the progress of a housebuilders’ sites. With this in mind, how are UK housebuilders' addressing health and safety risks on their sites?
Often overlooked once a site is fully developed, land is the very foundation upon which housebuilders change to build their profits. How can UK housebuilders mitigate against land acquisition risks in a time of increasing competition and market uncertainty?
What underpins the reputation of every successful housebuilder in the UK? The ability to provide customers with high quality homes on time. According to the Royal Institute of Chartered Surveyors (RICS), over 60% of industry members felt the industry to be undergoing a prolonged skills shortage. How can UK housebuilders manage employee skill and motivation in the current climate?
GOVERNMENT & REGULATORY RISK
Multiple risks exist around government and regulatory risk, including changes in tax rates, housing policy and environmental regulations. In the past few years, the most significant piece of recent legislation, Help to Buy (HTB), has been the most positive risk to housebuilders. However, HTB is only one initiative in an environment where compliance and foresight are crucial to keeping housebuilders ahead of the curve when it comes to government intervention.
PLANNING PROCESS RISK
Since the introduction of the National Planning Policy Framework (NPPF) in 2012 there has been a noticeable increase in the land available to housebuilders. Despite this, the securing of permissions to build on land still remains a process in which housebuilders must tread carefully if they are to achieve their committed growth targets.
Risks associated with the planning process are only one link in the construction process. Once planning is secured it becomes doubly important for housebuilders to demonstrate they can deliver on the permissions they have secured. Consequently, it should be noted that timely product delivery does come with its own raft of risks.
In an industry with extended project pipelines, the risks associated with liquidity can be make or break. If housebuilders are unable to tap sufficient cash flows the knock-on effects can adversely impact margins and undermine the integrity of their supply chains. How do housebuilders ensure that they retain sufficient access to liquidity in order to retain a healthy balance of competitiveness and growth?
Cybercrime is soaring, but how is the construction industry adapting to this new threat? According to the UK Government’s Cyber Security Breaches Survey 2018, the senior managers in construction are amongst those most likely to see cyber security as a low priority. With the proliferation of sophisticated data breaches and increasing regulation around cyber security, for how long can housebuilders continue to risk underestimating the disastrous potential of cyber threats?