How Two Industry Challenges Could Hit Housebuilder Cash Reserves in 2023

Posted by Colliers on 8th March 2023 -

Many listed firms boasts healthy levels of net cash but the cladding contract and emerging Net Zero requirements could soak up funds

They say cash is king, but it could be the key barometer for housebuilding firms in 2023 as they try to navigate two major industry-specific challenges alongside the uncertain macroeconomic environment. 

Housebuilders are facing an undeniably tricky period, with average house prices falling, fears of a recession, and stubbornly high material costs.

While it’s true these broad challenges could be worse; property prices are falling, but they’re doing so from record highs ; any economic downturn is now predicted to be shallower and shorter than first feared ; and some materials are seeing price rises cool , or even fall, there’s no room to be sanguine.

 The reasons that a heightened state of alert is still required by housebuilders is related to the cost of rectifying cladding across portfolios, and the burgeoning requirements of planning authorities for new developments to be Net Zero.

With the sale of new homes being that much more difficult than even just a year ago, protecting, generating and managing cash reserves will come into sharp focus.

Cladded in

In spite of the housebuilding sector’s successful push back against initial government proposals that the sector thought would leave potential costs open-ended, the financial drain that the cladding contract and Building Safety Levy could have is noteworthy, and its impact on every housebuilding firm’s finances should be closely watched.

Net cash levels of the UK’s major listed housebuilders ranges from £969 million at Barratt Developments to £107 million at Redrow. It’s highly likely, however, that these war chests will come under pressure this year.

The government’s cladding contract  commits developers to an “estimated £2 billion or more” for repairs to buildings they developed or refurbished in the past 30 years.

A January statement from the Department for Levelling Up, Housing and Communities stated: “This means that together with the Building Safety Levy, industry is directly paying an estimated £5 billion to make their buildings safe.”

That’s no small change, and as with many financial estimates from the government, predictions for expenditure usually rise rather than fall.

Sustainability squeeze

An eagle-eye also needs to be maintained on Net Zero policies emerging from local planning authorities.

Bath and North-East Somerset claimed at the start of this year it had become the first authoirty in England to adopt an energy-based Net Zero housing policy that includes a requirement for there to be sufficient on-site renewable energy generation to match the total energy consumption of the buildings. And Cornwall is close to approving something similar.

This is an additional – and costly – factor for housebuilders to consider when building new properties, especially at a time when house prices are falling, and firms are having to entice the likes of first-time buyers with mortgage holidays and ‘save to buy’ schemes .

It might just be one or two councils now, but the Net Zero push is only going to grow, and even if regulation is relatively slow to emerge across the country, it’s highly likely that housebuilders will need to respond to the increasing desire from homebuyers for more energy-efficient properties. 

The bottom line here is, well, the bottom line. How much cash will firms need to spend to ensure they adapt to a world where either planning authorities, consumers, or both, require their properties to meet more demanding sustainability standards?

The answer to that question, combined with the cost of cladding repairs, will emerge via the cash reserves of housebuilders in a year from now.

Read article on Colliers website 

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