Addi Spiers, partner in business support and restructuring at legal firm, Addleshaw Goddard, explores Aberdeen’s tentative steps towards recovery and the impact upon the housing industry
SCOTTISH housebuilders are cautiously optimistic, with the construction industry predicted to grow at a rate of 0.1 per cent over the next four years, in part due to the government’s target to build 50,000 new homes by 2021.
In spite of this, housebuilders were among the worst performing stocks on the FTSE 100 in the first few weeks of the year.
Indeed, the industry is estimating that costs, including materials and labour, will rise by three to four per cent in the next year.
These factors, coupled with fluctuating local economies, mean that businesses remain cautious.
As a whole, the UK housebuilding industry remains positive, but for certain regions/cities, recovery is slower.
This is true for Aberdeen.
Hit by the oil and gas downturn in 2014, house prices have fallen by more than 10% in the last three years. And yet the city is taking its first tentative steps towards recovery, as crude prices hit a three-year high.
Oil has been a vital aspect of Aberdeen’s economy for a relatively short period of time – since the mid-70s – which some critics say has led to the over-reliance and under-development of other sectors.
This is no longer the case, as the city is currently benefitting from the backing of the government and city council to diversify its economy and achieve sustainable development for the long term.
Although Aberdeen proved a lucrative market in the pre-downturn years, it has been challenging for housebuilders over the last couple of years.
Businesses must evaluate the risk and reward offered by a recovering market, to maximise opportunities while operating in a manner that doesn’t put their businesses under threat.
Traditionally, the Aberdeen market has been underpinned by high quality housing, well performing schools and universities and a gradually diversifying local economy.
At its peak in 2007, the average house price in Aberdeen hit £202,479, compared to £163,489 at the end of 2017.
As demand has dipped, some housebuilders have reduced how far in advance they take orders. While this helps to ensure project delivery on agreed dates and reduces the risk of underperformance, the precaution has also led to share prices falling as forecasts shrink.
In addition, the majority of housebuilders’ debt is held by just five banks, and without alternative sources of finance, the industry will inevitably suffer if low confidence continues. This is compounded by the fact businesses in the industry do not have credit ratings and therefore no access to the bond market, where participants can issue new debt or buy and sell debt securities.
This is a concern for the government’s housebuilding targets, as businesses naturally look to mitigate risk and maximise return on investment. To ensure delivery, a government-led inquiry into ‘land banking’ has been launched, so housebuilders do not restrict the number of properties built on a piece of land to increase house prices.
This is more likely to occur in lucrative areas and those with changing economies, such as Aberdeen.
It is a difficult balance for housebuilders to strike: between profitability and achieving external build targets, but it is imperative that businesses operate in a responsible manner – one which ensures the long-term viability of the housing market.
The recovery of the housing market in Aberdeen requires careful planning, particularly when it comes to purchasing land.
Just as the economy in Aberdeen is diversifying and working towards long term sustainability, so too must the housing market. This will build confidence once again, creating the right environment for the market to flourish.