Working Papers in Real Estate and Land Policy

THE UK HOUSEBUILDING INDUSTRY: AN ANALYSIS OF POST-BARKER STRUCTURAL RESPONSES

DR YOUNGHA CHO Department of Real Estate and Construction School of the Built Environment, Oxford Brookes University Tel: +44 (0) 186548 3941 Fax: +44 (0) 1865 383927 Email: ycho@brookes.ac.uk

REF: 2011/1 OXFORD INSTITUTE OF SUSTAINABLE DEVELOPMENT REAL ESTATE AND LAND POLICY RESEARCH GROUP (OISD-RELP)

Abstract

The Barker Report (2004) highlighted the lack of new housing in the UK over the past few decades. Subsequently several important policy recommendations were announced to both increase housing supply and to improve the quality of new housings through the sustainable communities programme. In 2007 a Housing Green Paper set out the government’s ambitious plan for new housing, with targets of 2 million new homes by 2016 and 3 million by 2020. The new housing programme could be seen as a major opportunity for UK housebuilders but at the same time the policy requirements such as supply of affordable housing, mixed-use, brownfield development, and delivery of sustainable homes and adoption of more innovative development process presented real challenges for the companies involved. The aim of the research is to investigate how the UK housebuilding sector has responded to the changes in housing policy following the Barker Report. Firstly the characteristics of the main players in the current UK housebuilding sector are examined. Secondly it investigates how well the government policy requirements have been met by housebuilding companies of different types and strategies. This study proves that size does matter in the UK housebuilding sector; the larger companies perform better in general in terms of unit completions and the related financial outcomes such as housing turnover and profit. The business strategy of companies appears to be an influential factor of their performance and of their responses to policy requirements. Of the companies themselves those focused in housebuilding and geographically diversified ones performed better than those which were highly diversified. However, the highly diversified ones responded much better than the focused housebuilders to policy measures such as the delivery of sustainable homes and the adoption of innovative development processes. Those with good partnership and collaborations with other specialist companies to deliver more innovative housing may be potentially the leaders in the housebuilding sector in the near future; different business approaches, managerial skills, financial strength and complementarity between businesses can make a company more responsive and sustainable in a changing environment.

Key words: UK, Housing Policy, Housebuilder, Business Strategy, Barker Report

The early version of this paper was presented in the Housing Economics Workshop, 2010 ENHR Conference, Istanbul. I would like to thank the participants of the workshop for their helpful comments; Henry Abanda for data gathering; and Austine Ngombe for literature review at the early stage of this study.

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1. Introduction The lack of new housing has been a topical issue since the Kate Barker Report of 2004. One of the key recommendations of the report was the acute need for affordable housing and for the more efficient use of brownfield land. Since then several important policy measures have been announced to increase supply and to improve the quality of new housing under the sustainable communities programme. The 2007 Housing Green Paper set out the government’s ambitious plan for new housing with targets of 2 million new homes by 2016 and 3 million by 2020. The government has also emphasized that improvements to the energy efficiency of housing are urgently needed to tackle the threat from climate change. A Code for Sustainable Homes for all new housing was announced and the government continues to show a strong commitment to zero carbon housing. The new housing construction programme could be seen as a good opportunity for UK housebuilders. At the same time policy requirements such as affordable housing, mixed-use development on brownfield sites, the delivery of sustainable homes and the adoption of more innovative development processes presented real challenges for the companies involved. Over the past three decades, the structure of the UK house building industry has been transformed through mergers and acquisitions (M&As) and it now appears rather more ‘concentrated’ than other industrialized countries (Ball 2008). The concentrated structure of the industry may indicate that large housebuilders have become more responsive to new ideas and challenges and more resistant to market volatility, having advantages from specialisation, economies in marketing, purchasing and procurement, and advantages in land banking (Ball 2008). This has raised several research questions as follows. Has the UK housebuilding industry shown it has the capacity to cope with new challenges? Which types of company have responded best to the policy changes? Do larger companies respond more positively to policy changes than the smaller ones do? Which types of company respond best to particular policy requirements? The post Barker challenges may reshape the structure of the UK housebuilding industry and the leading housebuilding companies will adopt different strategies in response to a changing environment. The aim of this research is to investigate how the UK housebuilding sector has responded to changes in housing policy since the Barker Report published. Research objectives are: � to investigate the characteristics of the main players in the current UK

housebuilding sector and identify the strategy which companies have pursued in the changing environment;

� to understand the challenges that the UK housebuilding companies faces following the Barker Report;

� to examine how well the government policy requirements are being met by the housebuilding companies;

� to analyse the relationship between the different types of company and the business strategies which they adopted and their policy responses.

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2. Overview of UK housebuilding industry and the challenges post Barker Report 2.1 Overview of UK housebuilding industry It was during the inter-war period that a private housebuilding industry emerged in a recognizable form in the UK (Wellings 2006b). With the main focus being on London, even by the 1930s the market was still very localised with most housebuilders being small local firms. The outbreak of the second world war however had a profound effect on the structure of the housebuilding industry. All housebuilding ceased as priorities switched to the construction of costal defences, airfields etc. By the ending hostilities, many of the pre-war firms had either disappeared or substantially changed their business. The most successful one had in the mean time become more dynamic contractors and were well placed to take part in the post-war housing boom which began in the early 1950s. From 1954 onwards, when building restrictions were lifted, the industry enjoyed a long period lasting almost 20 years until 1973 when the first recession started. Over that period, housebuilders began to expand their market into the regions and as a consequence a new generation of housebuilders emerged. Figure 1 shows the trend in housing completions since the end of World War II, distinguishing between private and public sectors.

Figure 1: Housing Completions, 1949-2009

Initially the public sector played a major role in the housebuilding programme, however, by the 1960s this had started to reduce. The underlying reason for this can be found in a fundamental shift in government housing policy from supply subsidy to demand subsidy. As a result the amount of social housing contribution has been greatly reduced with private housebuilders become the main suppliers of new housing. The first recession after the war started in 1967. Many housebuilders were eliminated and the industry had to cope with lower demand for almost decade. However growth in the 1980s produced another type of UK housebuilder, i.e. one with a more corporate structure which has since lead to the increasing domination of big national builders.

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Figure 1 also shows that the level of housing completions has remained low, at around 180,000 and 200,000 per annum, even though private output rose, in the boom of the late 1980s. Many suggest that the industry could not meet demand due to the pressures of a rising population, new household formation, geographical relocation and the need to replace existing housing stock. As a result the country experienced rapid increases in house price from the late 1990s onwards and as a result housing affordability has worsened especially in London and the South East. According to the NHPAU, for example in 2000 the ratio of lower quartile house prices to earnings was four with affordability predicted to worsen to ten, if supply was not increased dramatically (NHPAU 2009).

The housebuilding sector in the UK has traditionally relied on the government to commission social housing acting either as client or as sponsor through various housing related subsidies and grants. The government also plays a key role as regulator. For example, until recently the construction of social and affordable housing has been determined largely through the building regulation, then, after the Barker Report was published, planning policy began to have much greater influence. Over the past two decades the volatility of business cycle - booms and busts in the UK housing market- has brought about a major restructuring of the industry. This is reflected in the shift from medium-size regionally based firms, specialising mainly in housing, to multi-regional specialist housebuilders or subsidiaries of large conglomerates (Bramley et al. 1995). As a result, the UK housebuilding industry has now become more polarised than ever before as Table 1 below shows. Table 1. NHBS registered builders by number of units started per annum (2004-2008)

Units 2004 2005 2006 2007 2008

1-10 15,235 16,036 16,416 16,608 16,427 11-100 1,101 1,045 1,130 1,056 641 101-500 122 132 118 141 80 501-2,000 22 27 23 22 25 2,000+ 14 11 13 15 6 Total 16,494 17,251 17,700 17,842 17,179

Source: NHBC statistics Another important feature in recent years has been the consolidation of the housebuilding industry. Whereas there were 15 large firms providing more than 2000 units per annum in 2007, there were just 6 the following year. This is significantly lower than previous years due mainly to the impact of the economic recession. Table 2 below shows another aspect being the effect of consolidation on the market share of both the top 3 and the top 10 housebuilding companies between 1960 and 2008. The market share of the top 10 companies begins to rise significantly in the late 1960s and early 1970s and by 1995 they supplied 32% of total production, at the time when there were still more than 6000 companies building less than 10 houses a year (Bramley et al. 1995).

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Table 2. Market share of top 3 & 10 companies

Top 10 Top 3

percent Percent

1960 8-9

1973 17-18

1980 28

1995 32 15

2000 44 18

2004 46 23

2007 49 28

2008 35 23

Source: Wellings 2006, AMA Research 2009 Concentration in the industry continued to take place and the market share of the top 10 companies increased to 44% in 2000. Then, over the past decade, there has been further major change to the point where the industry has become dominated by large businesses dedicated solely to housebuilding. Many experts foresaw that the early part of the decade would see a shift towards a handful of big players taking control of most of the market and that the names of many large and medium-sized housebuilders would disappear, reflecting what has happened in other industries. The peak of the dominance of large builders is seen in the period between 2004 and 2007 when the top 10 companies delivered almost half of new production and the top 3 companies’ market share reached 28% in 2007.

2.2 Post-Barker Challenges Supply of affordable housing It was the Barker Report (2004) which highlighted the continuing mismatch between housing demand and supply based on systemic evidence. The report concluded that the current level of housebuilding is too low and it identified problems in planning, use of brownfield land, land banking, construction skills and construction methods as limiting factors in increasing housing supply. The report urged that output needed to rise and that more emphasis needed to be given to affordable housing. In its response, the government announced a commitment to increasing the volume of affordable housing. The construction of affordable housing was in fact made a priority as the spending review sought to promote a wider range of shared ownership schemes. In 2006, the government published the ‘Delivering Affordable Housing’ report to expand affordable housing. A significant amount of affordable housing has been delivered through planning obligations (otherwise known as a Section 106 Agreement). These require a certain proportion of affordable housing to be provided as part of a mixed use or private housing developments, in accordance with local planning policy. Accordingly this has lead to accusations that some schemes were rendered unviable because housebuilders are compelled to provide affordable housing in this way. Arguably this low profit dwelling should only be incorporated within high cost/high profit housing developments, if profit levels are to be maintained.

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Brownfield and higher density development Even though brownfield development was not a new policy, a number of pressure groups claimed that the proportion of brownfield development should be further increased to beyond the government target of 60% of new development (PPG3 2000) Planning Policy Statement (PPS3) for housing (2006) emphasised that Local Planning Authorities should continue to make effective use of previously developed land. In the mean time, the Housing Green Paper (2007) increased further the government’s housing target to 240,000 homes per annum by 2016 and re-affirmed the issue of more efficient use of brownfield. These policy measures increased the pressure on housebuilding companies to take up more brownfield sites in and around town and city centres. This focus on brownfield land brought about another set of challenges to housebuilding companies, especially for medium- and small-scale ones. Much brownfield land is contaminated and its remediation is critical to the re-use of brownfield sites and the leverage of investment into town centre regeneration (AMA Research 2009). Contaminated land is perceived as a high risk factor in terms of liability to the companies. The growing demand for affordable housing, a limited supply of residential land and the emphasis on the reuse of brownfield land have all been major factors in increased housing density. High volumes of flats or apartment buildings are set to continue in order to deliver government objectives of urban regeneration and meeting a national housing shortage, especially in terms of affordable housing. In addition, town centre regeneration requires different skills and experience from traditional housebuilding projects. For sound business reasons therefore the housebuilding companies have to either acquire these technologies and resources or making a partnership arrangement with specialist firms. It may be inferred that urban regeneration places a greater importance on financial strength; the sites are expensive to buy, there are infrastructure and decontamination costs to consider and the flats have to be built in complete blocks.

Delivery of sustainable homes Another challenge is that the government sets a world-first target for all new homes to be zero carbon by 2016. Subject to the policy, the housebuilding companies have to deliver sustainable homes with a minimum code level 3. The introduction of the sustainable homes code has had a number of benefits for the environment, as well as for residents, through lower running costs and a greater choice of different quality homes (CLG 2006c). Real progress has been made so far; however, achieving code level 6 has proved a big challenge for most housebuilders, as it requires major changes in design and specification in relation to energy-saving elements over the next decade (AMA Research 2009). It also reflects the high additional construction costs, especially the heating systems for smaller scale developments. The additional costs of building a home to code level 6 (zero carbon) are estimated as between £30,000 and £50,000 per unit, even though costs are likely to come down as technologies improve (CLG 2008).

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Adoption of more innovative development process In order to meet the UK government’s ambitious sustainability targets, housebuilders have to be innovate (Jones and Kaluarachchi, 2008). Goodier and Gibb (2007) note increasing interest in modern methods of construction (MMC), including the manufacture of housing components offsite which usually can then be supplied as either modules or panels. These use a range of materials with timber, steel or concrete being the main ones. Many authors (including Goodier and Gibb, 2007; Jaillon and Poon, 2008; Pan et al., 2007; Ko and Fenner, 2007) argue that the main advantages of offsite manufacture are less construction time on site, increased housing quality, reduced snagging and defects and increased value. Jaillon and Poon (2008) have discussed the benefits of offsite manufacture in terms of both sustainability and site matters such as less construction dust, noise and waste (up to 70%). Lovell and Smith (2010) argue that there are many other benefits : building elements manufactured at the factory can help reduce accident rates by up to 63%; health and safety levels are also improved; labour requirements are less by about 30%; and quality is easier to control. They also argue that on top of those may be added increased profits, less noise to neighbourhoods during construction and reduced construction time. Despite the increasing interest in offsite manufacture, the use of MMC, the UK construction industry lags behind in the uptake of new technology (Goodier and Gibb, 2007). Several reasons have been identified. Jaillon and Poon (2008), for example, have noted the complexities of interfacing systems, the difficulty of achieving economies of scale, a risk adverse culture, and client scepticism have had a negative effect on the uptake of offsite. Other factors included the unproven durability of offsite buildings, uncertainty about demand, the attitude of housebuilders themselves and the negative view of consumers (Lovell and Smith, 2010). It should also be noted that prefabricated homes have historically been associated with social housing, the ownership of which can carry a certain social stigma. Due to this mix of economic, financial, social, cultural, technological and symbolic capital factors which interact in intricate ways, the majority of housebuilders are reported to be reluctant to innovate and so they stick to traditional methods. This illustrates the inertia within the housebuilding industry regarding new innovative ways of construction. This leads us back to the main questions as to whether the UK housebuilding industry has the capacity to cope with these challenges, which types of company have responded best to changes in policy generally and which type s of company have responded best to particular policy requirements. 3. Research method This study investigates how successfully government policy requirements have been responded by housebuilding companies of different types. It also considers how specific housing policy measures have been achieved according to the different types of the company involved. Specific attention is paid to examining how different types of company have responded to policy change and to how they have met each policy requirement, using descriptive and statistical analysis.

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Figure 2. Framework of the study The top 110 UK housebuilding companies have been used based on 2007’s unit completion. Detailed information about the companies has been gathered from the websites of each company. Company’s annual report, financial statements and relevant publications as well as secondary publications have been main sources. The first set of data includes basic information on each company such as ownership, size, scope of business activities, the geographical range of their business operation and chosen strategies. The mode of ownership is divided into three; whether the company is a parent company in overall charge; whether it is a subsidiary linked to the parent company’s business; or whether it is an independent one with no business group connection. The scope of business activities is examined. Each company is investigated to establish whether it is purely a housebuilder or whether it involves other businesses as well. Using the UK Standard Industrial Classification (SIC), the scope of business activities is examined and each company is categorised either as ‘diversified’ or ‘focused on housebuilding’. Using the information above, a typology of the companies participating in UK housebuilding sector will be derived. The second set of information is about each company’s performance such as number of housing completions, turnover and profit. The performance data is gathered for the period between 1993 and 2008 from the three different sources (Housebuilder Publication 2004, AMA Research 2009 and from each company’s annual reports). Lastly, each company’s response to the policy requirements is examined. This is achieved by gathering relevant information through websites and the use of

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secondary data collection. This information covers the supply of affordable housing, brownfield development (flat/apartments in mixed use sites), practices that enhance and incorporate sustainability issues in their business, delivery of sustainable homes, and adoption of innovative building technology and processes. The data was gathered from summer 2008 and was updated to summer 2009. The three sets of information enable to analyse the dynamic relationship among the types of company, performance and responses to policy requirements. 4. Analysis of current structure of the housebuilding industry It is known that the emergence of large diversified firms is a key attribute of the modern housebuilding industry in UK (Ball et al. 1988, Hillebrandt et al. 1990). Diversification through merger and acquisition (M&A) and divestment has taken place at the same time in the UK housebuilding industry since the 1980s. This section investigates in detail the nature of the companies which are currently active in the UK housebuilding sector, their business scale and scope, market range and their adopted business strategies.

4.1 Business scale

There are many ways to categorise the size of a company, one of them being to base its number of employees, unit completions per annum, housing turnover (revenue) or profit. However the latter three factors can also be used to assess the outcome of a business. Therefore in this case the number of employees which is broadly used in other industries is used to categorise the size of the company. The average number of employees of the total 110 companies appears to be 644 with a maximum 5115. Table 3. Size of the company in 2007

Frequency Percent Average no of employees

Large (+500 employees) 22 20.0 1,800

Medium (100-500 employees)

32 29.1 230

Small (-100 employees) 56 50.9 63

Total 110 100.0 1,089

As seen in the above table, 20% of the companies are large scale employing more than 500 full time employees, 30% are medium sized and nearly half are small scale. Table 4. Ownership of the company

Frequency Percent

Group parent company 28 25.5

Subsidiary 22 20.0

Independent 60 54.5

Total 110 100.0

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Just over half the companies are solely independent with the other half being either a parent company, running related or unrelated businesses within the group, or a subsidiary of a parent company. This means the last two groups tend to obtain some financial or operational support within the group with possible shared business goals and objectives. Table 5. Company ownership by size

Group parent company

Subsidiary independent Total

Large 14 5 3 22

50.0% 22.7% 5.0% 20.0%

Medium 9 11 12 32

32.1% 50.0% 20.0% 29.1%

Small 5 6 45 56

17.9% 27.3% 75.0% 50.9%

Total 28 22 60 110

100.0% 100.0% 100.0% 100.0%

Table 5 indicates the nature of the companies and size differences within the ownership structure. It is not surprising to see that there are more large and medium size companies in the first two groups- parent and subsidiary companies-, whereas more small-scale companies (75%) are in the independent category. Table 6. Geographical range of the business Frequency Percent

National 18 16.4

Semi-national 6 5.5

London 13 11.8

South 19 17.3

East 7 6.4

Midlands &Wales 11 10.0

North 23 20.9

Scotland 13 11.8

Total 110 100.0

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It may be noted that of the 110 sample companies, 18 (16.4%) cover the national housing market and that the majority of the companies (78%) are local builders who cover one or two local areas within the region. The other 5.5% operate their business at semi-national level.

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Table 7. Market range by company size National Semi-national regional Total

14 3 5 22 Large

77.8% 50.0% 5.8% 20.0%

3 3 26 32 Medium

16.7% 50.0% 30.2% 29.1%

1 0 55 56 Small

5.6% .0% 64.0% 50.9%

18 6 86 110 Total

100.0% 100.0% 100.0% 100.0%

As expected, the majority of national builders are large scale whilst nearly all small builders cover only a couple of their own local areas. 30% of the regional or local builders are in medium scale business employing between 100 and 500 people. 4.2 Scope of the businesses The housebuilding industry is often viewed as a subset of the construction industry because of its obvious physical similarities. However, the economics of private housebuilding are actually different to the rest of the construction sector. Contractors are normally attracted by the high returns on speculative housing and they have to come to terms with the different management approach. Wellings (2006b) emphasises that marketing, sales and land improvement are vital parts of the housebuilding business. Land must be bought in bulk and infrastructure such as roads, drains and other utilities should be provided before individual serviced plots can become available. Gibb et al. (1997) and Smyth (1985) emphasize land development profit as a major part of making profit in housebuilding business. Short et al (1986) also mention that housebuilders derive substantial profits from increases in land prices. In cases where housebuilders operate along with construction business, they have to learn the disciplines of fixed price contracting. The reality is that the two disciplines require different management approaches, despite the similar labour requirements of the two businesses. We have seen some construction companies easily moving into housebuilding and vice-versa in the past. Moreover the high rate of M&As which have been taking place in the UK housebuilding sector since 1980s would imply that companies have a wide range of operation. Table 8 summarises this showing the scope of the businesses that the participant companies are currently involved in. Apart from housebuilding, they also run general construction, infrastructure, refurbishment and regeneration as well as non-construction activities such as facility management, building material manufacturing and property investment.

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Table 8. Types of business of participant companies Category Definition Residential building The following types of buildings were considered: apartment

block, duplex, nursing homes and all types of houses. Non-residential All buildings those are not residential including educational,

government, industrial, military and commercial buildings.

Infrastructure This includes heavy construction such as motorways, streets, bridges, railways, tunnels, outdoor sports facilities, parking, etc.

Refurbishment This includes major maintenance and minor repairs of parts of building. Additions and alterations are also considered under this category.

Facility management Building services such as air-conditioning, electricity and heating systems were considered.

Regeneration This includes schemes of major demolition and rebuilding, or the upgrading of rundown parts of an urban area.

Timber manufacturing

This encompasses the supply of innovative timber building technologies. It includes design services and modern methods of construction using timber.

Finance This includes financial activities such as collaborating with banks for the provision of mortgages.

Excluding the missing cases from the data, 23 of the 105 participant companies run a general contracting business as well as traditional housebuilding operation. 7 companies are actively involved in urban regeneration, 4 companies which run a financial business and 4 which run facilities management. Only two companies are engaged in the supply of innovative timber building technologies.

Figure 3. Number of companies which run different businesses Based on the information above, we can categorise the participants into two groups: whether they focus on housebuilding or whether they diversify into other businesses. Table 9 shows that 82 companies out of the 105 are focused on housebuilding business only whereas the other 23 companies are running other businesses either in related or unrelated areas. The table also shows the information by the companies’

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size. Again it is perhaps not surprising to learn that the majority of diversified groups are large or medium size and that majority of the housebuilding focused ones (62%) are small scale. However, it is noteworthy that 13.4% of the focused housebuilding group are large and 22% of the diversified group are in the small business group. Table 9. Size of the two types of company

Focused Diversified Total

11 8 19 Large

13.4% 34.8% 18.1%

20 10 30 Medium

24.4% 43.5% 28.6%

51 5 56 Small

62.2% 21.7% 53.3%

82 23 105 Total

100.0% 100.0% 100.0%

5. Typology of the housebuilding companies and performance

Based on the market coverage and scope of the businesses of the main companies, a typology of participant companies was derived. We can categorize the participants into four groups based on whether the company diversifies into other businesses or other markets or both. Table 10 demonstrates the distribution of the companies according to the four groups.

Table 10. Typology of the participants

Frequency

Percent

Group A Both focused 73 69.5

Group B Housebuilding focused+ market diversification

9 8.6

Group C Business diversification+ market focused

11 10.5

Group D Both diversification 12 11.4

Total 105 100.0

Nearly 70 % of the participants are in the Group A, showing they are focus on housebuilding business and targeting a couple of local areas. Group B indicates those concentrating housebuilding but targeting national or semi-national housing markets. This group represents the specialised housebuilder covering the national housing market. Group C is the one which has diversified into housebuilding from their core businesses in terms of their products but focused on one or two local or regional areas. Lastly Group D represents diversified companies both in terms of products and markets. Table 11. Typology of the participants by company ownership

Group A Group B Group C Group D total

both focused

HB focused+ market diversification

Business diversification+ market focused

both diversification

Group parent company

11 4 5 5 25

15.1% 44.4% 45.5% 41.7% 23.8%

Subsidiary 12 2 1 6 21

16.4% 22.2% 9.1% 50.0% 20.0%

Independent 50 3 5 1 59

68.5% 33.3% 45.5% 8.3% 56.2%

Total 73 9 11 12 105

100.0% 100.0% 100.0% 100.0% 100.0%

Group A Group A makes up of companies focused on housebuilding in just a couple of local areas. The majority of them are independent (70%) and medium sized firms (60%). We can describe this group as being made up of local or regional based residential housebuilders who build traditional rural and suburban homes. They focus on low-to medium-cost housing within a local or regional market and they construct a range of properties including 1-2 bedroom apartments, 3-4 bedroom homes and 5 bedroom town houses and detached properties. The leading firms are Fairview New Homes based in London, Morris Group based in Cheshire, Surrey based house builder Crudace Homes Ltd, Bewley Homes plc, Shepherd Homes and Tulock Homes which is one of the largest private housebuilders in Scotland. Some of them are niche developers which contract to build affordable housing (Crudace Homes). Others are specialists in the redevelopment of sites in residential areas, providing affordable homes predominantly brown field land (Fairview). Some of the leading companies are also involved in regeneration projects through their group. Group B This group represents the leading national builders who specialise in housebuilding such as Taylor Wimpey, Persimmon, Bellway, Bryant Homes and Crest Nicholson etc. The majority of this group has kept its top 10 position for the five years. Unlike Group A, most of the companies are either a parent company (44%) or a subsidiary of a big business group (33%) and only 22% are independent housebuilders. Most of the group build all types and sizes of houses and have recently focused on urban regeneration

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and mixed use development including affordable and social housing. A few of them focus on retirement housing. Taylor Wimpey is a typical example. It became one of the UK’s leading housebuilders through the merger of George Wimpey and Taylor Woodrow in 2007. The company restructured its UK operations after the merger and divested the construction business in line with a strategy of focusing on its core homebuilding operation. It created a new brand providing affordable homes for key workers and first time buyers, building predominantly on inner city brownfield sites. Bellway plc is a specialised national housebuilder, producing a range of flats and large family homes (detached houses) on both green and brownfield sites. They are builders of affordable housing using renewable energy technology and they sell a number of these to RSLs . They also provide EcoHomes standard housing. They recently expanded to Scotland where a higher percentage of detached homes are still permissible. There are some companies targeting certain niche market. Crest Nicholson Plc, Bloor Homes and Countryside Properties are the examples. They focus on urban regeneration and mixed use development providing affordable and social housing. Bloor Homes and Countryside properties plc are the main providers for the Home and Communities Agency and for housing associations. McCarthy and Stone plc. specialises in private sector retirement properties on a national scale. They provide sheltered housing and individual retirement flats with additional communal areas, security systems etc, within the retirement housing field. The company builds 100% on brownfield sites. Group C Group C is the one which runs a housebuilding business at a regional or local level and completes less than 500 units a year. These companies undertake housebuilding activities as part of a much wider range of general construction activities often in form of social or affordable housing and refurbishment. Steward Milne, William Davis and Weston are the leading companies. Among them, smaller ones such as Chase Midland, Michael Shanly Homes, Kendrick Homes, Rushmon Homes and Wates Homes complete less than 100 units a year. Steward Milne is an established housebuilder in Scotland and one of their divisions, Steward Milne Timber system, is the UK’s leading provider of timber systems. They supply timber frames constructions to the commercial, residential and affordable housing sectors and they have partnering arrangements with RSLs, housing associations and major developers. They also contribute to meeting the Code for Sustainable Homes in England and Wales (AMA research 2009). Group D Lastly Group D represents diversified companies both in terms of products and geographical markets. The majority of them are either parent companies or subsidiaries of a group. They also tend to be large or medium sized and to target national or semi-national markets. Barratt, Persimmon, Berkeley Group, Bovis Homes, Galliford Try, Kier, Lovell Partnerships, Redrow, Willmott Dixon, Miller are some well known examples. This group has achieved considerable growth in the housebuilding sector both organically and through a number of acquisitions over the last decade. Many of these companies run more than two businesses i.e. housebuilding and a range of commercial activities such as leisure, retail, education, hotels, health, and

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infrastructure provision. A number of them have international branches. There is also a tendency to specialize in other key businesses such as timber-frame manufacturing operation (Persimmon plc) facilities management and PFI projects (Kier group). Galliford Try Plc has five divisions including infrastructure provision e.g. road, rail, flood invention and renewable energy. The Cala group operates financial service as well as residential development and property management. This group of companies has continuously expanded its operations mainly through M&As and it has undertaken major restructuring in response to significant changes within the group. The majority of this group has several national brands within the company i.e. traditional housing for larger families, luxury apartments and penthouse type apartments in urban regeneration project. They also build starter homes under a separate regional brand. The majority of this group is also specialists in urban regeneration and mixed use developments, virtually targeting for inner city luxury housing on brownfield sites. Another distinctive features in that the companies in this group are specialized in affordable housing using modern construction techniques (MMC). Galliford Try Plc for example works closely with the Homes and Communities Agency and other housing and regeneration organization to construct distinctive mixed use schemes. The Bovis Homes Group Plc builds a variety of properties ranging from 2-5+ bedrooms market housings to retirement homes and social housing units in partnership with housing associations. Willmott Dixon also specialises in social and affordable housing with their focus being mixed-tenure development, key worker accommodation and social housing. Some of the companies in this group are showing leadership in constructing innovative eco-friendly homes. Barratt for examples provided the Green House prototype home at the BRE’s Innovation Park using an award winning design and achieving Code level 6, the highest government’s standard. The Berkeley Group Plc also continues to develop EcoHome standard housing using a variety of energy-saving technologies and materials for the project. Typology vs performance It is generally accepted that companies which diversify into speculative housebuilding, or housebuilders who diversify extensively out of their core business, appear to have been less successful in comparison with ‘pure’ housebuilders. This may be due to a lack of business focus. Another explanation is that housebuilders typically expand their products or services into general construction activity which requires a different set of attributes and skills (Wellings 2006b). This section explores the performance of different groups of companies based on different typology. Figure 4 shows differences in terms of number of employees and capital employed. As can be seen, there are big differences between Groups A, C and Groups B, D, the capital employed of the latter group being more than 10 times that of the former one. The number of employees shows a similar pattern.

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Figure 4. Number of employees and capital employed Figure 5 shows each group of company’s unit completions for the past 9 years (2000-2008, the green bar). Again the pattern is similar with the Group B companies achieving the highest completions, followed by Group D, whereas the completions for Groups A and C remain relatively low. The table also shows the unit completions for the pre- and post- Barker periods, there being an obvious increase after the Report due to the government’s commitment to increase new dwellings and also the housing boom at that time. Both Groups B and D show a 50 percent increase after the Report, though Group A only managed a 20 percent increase. Unfortunately we could not gather the information for the Group C.

Figure 5.Unit completions by typology

The graph below (Figure 6) shows the pattern of unit completions for each group over a 9 year period (2000-2008). It also demonstrates four fit lines representing the trend for each group. These lines are based on iterative weighted least squares in the SPSS package. We can see the continuous increasing trends, even though the trend of Group D slows down after 2006. In case of Group C, unfortunately we could gather unit completions only between 2000 and 2003.

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Figure 6. Unit completions Turnover (revenue) and profit were also considered. Diversification of the participant companies suggests they may contain different mixes of low margin social or affordable housing, high margin land dealing and possibly low margin construction. The two graphs below demonstrate some interesting points. Both housing turnover and profit show the same consistent pattern, with Group B being highest, followed by Groups D. However, after 2005 the performance of Groups B and D shows a declining trend, whereas Group A and C continue to make a steady increase. The declining trend of Groups B and D is particularly marked in the case of profit (Figure 8).

Figure 7.Housing turnover

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Figure 8.Housing profits

We can interpret the changing pattern of turnover and profit as a result of the combined effect of higher discounts and increased volumes of lower priced housing. Once the housing market had clearly slowed down, the majority of companies reluctantly decided to discount the selling prices in order to sell the existing stocks. Also the majority of companies continue to increase the proportion of affordable (low priced) housing in their development projects in order to meet government requirements. Then can we say whether size of company really matters? The findings above prove that size does matter; the large companies perform better in general in terms of unit completions and the related financial outcomes such as housing turnover and profit.

6. The response to policy changes This section examines how the different types of company have responded to policy requirements and it investigates whether there are relationships between company responses and company size and business scope. For this, a simple policy response scale is created. It should be noted that this scale is based on data and information available from company websites and publicly available reports. The scale comprises five different categories of measure namely, supply of affordable housing, brownfield development, sustainability practice, delivery of sustainable homes and adoption of innovative development process. The detailed definition of each category and how to calculate the policy response scale of each company are described in the Table 8. Same weight (5) is given to each category and total scale is to be made up 25.

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Table 12. Definition of the policy response scale Policy response category

Description Weight

Supply of affordable housing(AH)

This indicates whether the company is involved in the supply of affordable and social housing. (If yes=1, if no=0) x5

5

Brownfield Development( BF)

This indicates the amount of brownfield, mixed use development as a proportion of the total development. (% of brownfield development ) x5

5

Sustainability Practice( SP)

This variable indicates whether the company has an explicit well-defined sustainability policy in place and whether it applies this in the practice. � Sustainability policy: This variable indicates if the

company has an explicit well-defined sustainability policy in place. (If yes=1, if no=0)

� Sustainability team: This variable is used to indicate if the company has a sustainable team or a staff in charge of sustainable issues within the company. (If yes=1, if no=0)

� Sustainability report: This variable indicates if the company has sustainability reports for the current or past years. (If yes=1, if no=0)

� Health and safety: Recently, the social dimension of the sustainable agenda has been gaining ground in many domains. In the house-building industry, health and safety of personnel on project sites and in company offices is a major factor. In this report, the inquiry was about the availability of an explicit health and safety policy in place. (If yes=1, if no=0)

� Recycling policy: This indicates if the company has a recycling policy. This particularly concerns the recycling of building construction waste. (If yes=1, if no=0)

Total 5 1 1 1 1 1

Delivery of sustainable homes( DSH)

This indicates whether the company delivers sustainable homes as per the two categories below. � Sustainability price award: This indicates if the

company has received any major housing award. This is an important factor as many awarding bodies in the house building industry require some sustainability credentials to be met by the company. (If yes=1, if no=0)x 2.5

� Case studies: This indicates if the company has accomplished an outstanding or a demonstration project that incorporates sustainability. (If yes=1, if no=0)x 2.5

Total 5 2.5 2.5

Adoption of innovative development process( IP)

� Innovation: This indicates if the company uses the different kinds of innovative eco-friendly features or technologies incorporated in a housing project. Some notable examples are: air-crete concrete walls, air source heat pumps, solar hot water systems, modern methods of construction (MMC), rain water harvesting, etc. (If yes=1, if no=0)x 2.5

� Partnership: This indicates if the company uses

Total 5 2.5 2.5

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partnership with other specialist or not. The increasing pressure on house-building companies to incorporate sustainable construction principles in their projects has led to many modes of joint ventures or partnering in housing businesses. In addition to traditional contracting and subcontracting, many companies jointly venture in housing development projects with the aim of sharing risk, acquiring skills and technology, acquiring information for design purposes and finally the need to complement each other in other domains. (If yes=1, if no=0)x 2.5

Total policy response scale (PRscale) 25

The maximum point of the policy response scale is 25 and the scale of each company has been calculated. Each type of company runs different sizes of business and retains different levels of human, financial resources and technological resources for their business. Figure 9 shows the policy response scales for different classes of company (size, ownership, market range and business strategy).

Figure 9. Policy response scales by nature of the companies

We can see that there are no big differences in the scales between different ownership structures, but there are clear distinctions between size of company and the ranges of market and business strategy. It can also be seen that the large/medium companies and companies targeting national and semi-national market are the better performers. We can see that there are no big differences in the scales between different ownership structures, but there are clear distinctions between size of company and the ranges of market and business strategy. It can also be seen that the large companies, companies targeting national and semi-national market, and diversified companies responded better to the policies in general. Figure 10 shows how the different types of company responded to policy requirements as a whole (PRscale)

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Figure 10. Policy response scales by groups As a whole, Group D shows the highest response to the policy changes (15.84 out of 25), closely followed by Group B (14.28). Group C ranks third and Group A the lowest. This is an interesting finding as the scales of each group of companies show a different picture compared with their performance which we saw in the previous section. It is noteworthy that each group of company responds differently to the different policy requirement. In the case of brownfield development (BF), Group B performs the best, followed by Groups D and A, leaving Group C at the bottom. The supply of affordable housing (AH) shows a large variation among each group of company. Group B performs the best (100%) followed by Group D (70%), leaving the other two groups with poor performance. The response to sustainability practice (SP) in the company’s business appears to be relatively poor for all the groups.

Figure 11. Policy response scales to different policy agenda by groups The other two categories show very different pictures. The diversified groups (C and D) rank the highest for the delivery of sustainable homes (DSH), leaving the focused housebuilders (Groups A and B) behind. Again the diversified groups (C and D) are ahead in the adoption of innovative development techniques (IP). Even though the simple policy response scale provided us a general picture on how the different types of companies responded to the specific policy requirements, it has limitation in measuring the level of response to policy changes accurately. The web-based information and secondary data could implicitly give us biased information. For example, the performance of those who were very pro-active in marketing through their

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web-site and annual publications must have been measured reasonably, whilst those of the companies who lacked those kinds of publicity may have been underestimated. More detailed survey on the companies’ practice using in-depth interviews can improve the way of measuring the level of response to policy. Accordingly the policy response scale can also be developed in more sophisticated way. 7. Discussion and implications This study firstly examines the characteristics of the UK housebuilding sector, business strategies and performance. It investigates how well the government policy requirements are being met by housebuilding companies of different types and sizes. It also considers how specific housing policy measures are influenced by the nature of the companies involved. Specific attention is paid to an examination of how different types of company respond to policy change and to their contribution in meeting each policy requirement using descriptive analysis. Scale economies as referred to by Chandler (1990) in describing the major reasons for modern industrial enterprise do not provide an adequate explanation for the growth in the size of UK housebuilders. Scale economies relate not so much to the size of the production unit but to the size of the company in the UK housebuilding sector (Ball 2008). The larger companies perform better in general in terms of unit completions and the related financial outcomes such as housing turnover and profit. So does size really matter in the UK housebuilding sector? Yes, it does. Besides the financial outcome, the large company have a number of advantages derived from its size. Access to land is the key to a housebuilder’s success and the whole process of site finding, negotiation, purchase and obtaining planning permission is a major undertaking. Moreover the ability to acquire suitable land depends on a whole variety of factors, i.e. knowledge of what might be for sale in the market, expertise in assessing its development potential, negotiation skill and the financial resources to secure the purchase. Even though it was not proved that the first three of these factors require large organisations in order to be effective, the last one- financial strength- can be an important factor when size of company might be an advantage in facilitating the purchase and exploitation of large sites (Wellings 2006b). The advantage of large scale organisations can also be proven as an important determinant in the consolidation of the housebuilding sector in the UK. Diversification of the UK housebuilders through M&As is another distinctive attribute of the modern housebuilding sector. This study proves that UK housebuilders have diversified into unrelated business activities either as part of a conglomerate structure or as an independent entity. The current common areas are commercial development, regeneration and refurbishment, timber frame manufacturing, facilities management, and financial activities. Housebuilders can easily move into commercial property simply because development skills are the core of success for both disciplines. The stronger synergy between the two areas can be found. There is a recognisable complementarity between speculative housebuilding and speculative commercial property which is not found in the construction process (Wellings 2006b). Regeneration, refurbishment, and construction of infrastructure are required the different experience and management approach, despite the physical similarity between the businesses. We should not forget that unrelated diversification which has no particular operational synergy with housebuilding can be a complete disaster. Whatever structure has been adopted by individual companies, the success of the diversification has been mainly affected by the housing cycle (Wellings 2006a).

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Even though the existence of scale and scope economies has not been tested using sophisticated models in this study, the descriptive analyses give clear messages about the performance of different types of company. Focused and geographically diverse large housebuilders (Group B) perform better than highly diversified ones (Groups C and D) in terms of unit completions and turnover. This proves again that geographical diversification performs much better than product diversification in the housebuilding sector. The analyses of the responses to policy change carry rather different implications. The focused and large housebuilders performed better in the supply of affordable housing. On the other hand the diversified groups (C and D) responded much better than the focused housebuilders to the other policy measures such as delivery of sustainable homes and the adoption of innovative measures (It should also be noted that the diversified groups comprised only about 20% of the participants). We can confirm this from several case studies. One of the best examples is Barratt Developments plc which built the ‘Green House’ prototype home at the BRE’s Innovation Park using an award winning design (AMA Research 2008). Persimmon plc’s new eco-housing which has been built using offsite manufactured materials from the group (Space4) is another good example. In fact there are many companies which adopt innovative technologies and methods in the development process. Berkeley Homes is one of the main pioneering companies in this field and has incorporated a range of renewable energy technologies including wind; bio mass CHP; solar thermal and photo voltaic panels; and air and ground source heat pump. Another key aspect of their positive response is the use of recycled materials such as plasterboard, timber flooring and lightweight blocks (AMA Research 2009). Consideration has been given to how some companies may lack expertise in a particular domain may prefer partnering with a company that possesses the required expertise or with a specialist in that domain. An example is Barratt Homes teaming up with one of the UK’s leading power and gas companies, E.ON, to deliver low cost and reliable solutions to meet the Government’s zero carbon homes agenda. This alliance exploits Barratt’s experience in energy efficient homes and E.ON’s world-wide experience in low carbon energy technology and research and development facilities. It also emerged from the study that most companies collaborate with the local community so as to obtain useful information on how best to design for sustainable communities. In this regard, these companies go into partnership with local communities and local government. The major companies such as George Wimpey and Galliford Try have collaborated with local government authorities, typically in the form of partnerships to deliver projects which meet local needs. These findings indicate an important message. The focused large housebuilders (Group B) achieved the best performance in terms of housing completions and turnover before the Barker report. However from now on, or in the near future, different types of company may become the main actors in the housebuilding sector; different business approaches, managerial skills, financial strength and complementary between businesses can make a company more responsive and sustainable in a changing environments. From these findings, we can say that the post Barker challenges have reshaped the structure of the UK housebuilding industry and that the leading housebuilding companies continue to adopt different strategies in response to a changing environment.The Callcutt Review (2007) indicates that other business models in addition to the current trader models can be introduced to increase the delivery of new homes such as the investor model and also the RSL build-for-sale model. The

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government has also recognised the increased potential role of commercial developers and foreign companies. In recent years we have already seen the entry of major contractors and outstanding developers in the housebuilding sector such as Galliford Try, Morgan Sindall, Kier group and Balfour Beatty and outstanding developers like Quintain, Land Securities, Canary Wharf Group and JJ Gallagher. The new types of participants and their role in the housebuilding sector is an intriguing phenomenon which implies there may be another restructuring process in the industry, perhaps in recent future. References AMA Research, (2009) Housebuilding Market UK 2009-2013. Gloucestershire, UK. Ball,M. (2008) Firm Size and Competition: A Comparison of the Housebuilding Industries in Australia, the UK and the USA, A report for the RICS education trust. Ball, M. Harloe M. and Marten M. (1988) Housing and Social Change I Europe and the USA, Routledge, London. Barker K. (2004) Review of Housing Supply, Final Report – Recommendations, HMSO, London Bramley G. Bartlett, W. and Lambert C. (1995), Planning, the Market and Private Housebuilding, UCL Press, London.

Chandler A. (1990) Scale and scope the dynamics of industrial capitalism, The Belknap Press of Harvard University, Cambridge MA.

Communities and Local Government (2006a), Delivering Affordable Housing, London Communities and Local Government (2006b), Planning Policy statement 3: Housing, London Communities and Local Government (2006c) The Code for Sustainable Homes: A step-change in sustainable home building practice, London Communities and Local Government (2007a) The Review of Housebuilding Delivery - the Callcutt Review, London Communities and Local Government (2007b), Housing Green Paper: Homes for the Future: more affordable, more sustainable, London. Communities and Local Government (2008), Cost Analysis of the Code for Sustainable Homes, Final Report, London. Gibb K, McGregor A, Munro M, (1997) "Housebuilding in a recession: a regional case study" Environment and Planning A 29(10) 1739 – 1758 Goodier, C. and Gibb, A (2007) Future opportunities for offsite in the UK, Construction management and Economics 25(6): 585 – 595. Housebuilder Publication (2004) Housing marketing Intelligence Report, London

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Jaillon, L. and Poon, C. S. (2008) Sustainable construction aspects of using prefabrication in dense urban environment: a Hong Kong case study, Construction management and Economics 26(9): 953 – 966. Jones, K. and Kaluarachchi, Y. (2008) Performance measurement and benchmarking of a major innovation programme, Benchmarking an International Journal 15(2): 124 – 136. Ko, J. and Fenner, R. (2007) Adoption of energy efficiency innovations in new UK housing, Energy 160(EN4): 151 – 163. Lovell, H. (2007) Exploring the role of materials in policy change: innovation in low-energy housing in the UK, Environment and Planning A 39(10): 2500 – 2517. Lovell, H. and Smith, S. J. (2010) Agencement in housing markets: the case of the UK construction industry, Geoforum 41(3): 457 – 468. NHPAU (2009) Rapid evidence assessment of the economic and social consequences of worsening housing affordability. Pan, W., Gibb, A. G. W. and Dainty, A. R. F. (2007) Perspectives of UK housebuilders on the use of offsite modern methods of construction, Construction management and Economics 25(2): 183 – 194. Short, J. Flemings, S. and Witt, S. (1986) Housebuilding Planning and Community Action, London. Smyth, H. (1985) Property Companies and the construction industry in Britain, Cambridge Wellings, F. (2006a) Private Housebuilding Annual, London: Credit Lyonnais Securities. Wellings, F. (2006b) British Housebuilders: history and analysis, RICS research, Balckwell Publishing.