Market Risk. The risk that the housing market may founder, or there will not be demand for the houses when finished.
The speculative housebuilder model “(Speculative) housebuilders are not in business to serve the public interest, except incidentally. Their primary concern is to deliver profits for their investors, now and in the future – in other words, to ensure that their business is a good investment.” The Calcutt Review 5
Herein lies the advantage that large housebuilding companies have over small ones; with the ability to spread risk more widely comes a greater ability to absorb shocks. This also means there is an advantage for housebuilding companies in buying-up land long in advance of its development, sometimes without even developing it; a practice known as ‘land banking’. Land banking has been widely criticised as anti-competitive because it its role in driving land price inflation, but for housebuilders working to protect a steady revenue for their shareholders, it is a necessary business strategy.
In the typical speculative housebuilder model (known as the ‘current trader’ model), a single housebuilder is building a batch of, for example, 30 houses. He plays the role of land promoter, acquiring land, procuring designs, securing planning permission, raising finance and contracting the dwellings, while marketing them to buyers. But in taking control of the entire process, the housebuilder is also taking on a huge amount of risk; in fact the ‘speculative’ element lies in taking on as much of the risk of the venture as possible in order to get the maximum reward. Rather perversely, but not surprisingly, the housebuilder’s job subsequently consists of trying to mitigate that risk in every way possible.
Undoubtedly the riskiest, and most bizarre part of the speculative housebuilder model is that the end users are unknown at the outset: the housebuilder is making a prediction that they will exist based on local market data. In a sense, the model works backwards: rather than designing 30 houses for 30 actual families, the housebuilder builds 30 houses for an imaginary, universalised ‘average’ household, and hopes that they will be able to find buyers. This means a big extra risk for the housebuilder, and results in a rigid one-size-fits-all design model, even on very small-batch developments.
The risk comes in three different forms: Planning Risk. The risk of being unable to acquie land with planning consent for housing or secure planning permission for a sufficient number of dwellings to yield a profit. Project Risk. The risk of rising costs associated with site works and the delivery of the project.
5. The Calcutt Review (DCLG, 2007)
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