Super developers: friends or foes to the UK construction industry?

Andrew Pepper is a partner and head of restructuring at ReSolve

The construction industry is vitally important to the UK economy, with it contributing more than £125bn per annum to GDP and employing around three million people. However, as most people are well aware, the sector has faced many challenges in recent years, with the number of firms unable to pay their debts up 36 per cent from pre-pandemic levels. Unfortunately, this trend is set to continue throughout 2024, with the sector remaining the biggest contributor to UK company insolvencies.

“Many will be left with no choice but to sacrifice margin in favour of a deal with a larger developer, creating a race to the bottom with little room for error”

One factor that is having an increasingly important impact on the UK construction sector is the creation of super developers. These are being formed as a result of recent mergers, such as the Barratt-Redrow deal, which has led to much larger market participants creating a ‘superleague’ of housebuilders.

What has led to the rise of the super developers?

Mergers and acquisitions are taking place among construction firms due to the need for scale to combat headwinds created by the challenging planning and regulatory backdrop combined with the rising costs across the board for raw materials. In addition, continuously high interest rates are leading to low consumer demand, high borrowing costs and general market lethargy.

Housebuilders in particular are facing a double whammy, with consumers struggling to finance the purchase of a house while at the same time seeing their cost base rise on the back of inflation and ongoing supply-chain-related issues. All of these factors lead to companies in the sector being vulnerable to takeovers and mergers and therefore the formation of super developers is a trend that is likely to continue.

Who benefits and who loses out?

Clearly, the main beneficiaries of these mergers are the parties involved, as they will have greater purchasing power and find themselves better able to dictate terms to others further down the supply chain. The squeeze on supplier margins to bring costs down from the super developers and their improved bargaining position inevitably has a knock-on effect on smaller suppliers, who may struggle to operate on such competitive terms. Many will be left with no choice but to sacrifice margin in favour of a deal with a larger developer, creating a race to the bottom with little room for error.

Unfortunately, jobs will also be lost when the newly formed developers look to reduce costs by combining talent and eliminating duplicate roles.

Super developers are looking to control the supply chain by tying up deals with partners they know are capable of servicing their new increased scale and potentially looking at acquiring companies within that supply chain. Such efficiency drives tend to work well for bigger organisations but result in a bruising time for smaller UK SMEs. The subcontractors in the supply chain miss out due to being squeezed and there being fewer housebuilders to engage with and influence, which leaves the super developers with greater bargaining power.

On the flip side, large-scale developers do bring with them certain advantages, such as their ability to hold sway with planners and influence central government, which may have the effect of creating a more favourable regulatory and policy environment for industry participants.

The reduced competition in the market as a result of these mergers needs to be monitored closely. With fewer players there could be less choice for consumers and less incentive for innovation in the sector. The super developers could set the tone for the rest of the industry due to holding so much power, leaving smaller peers defenceless. However, it is clear that the Competition and Markets Authority is not afraid to investigate where it deems necessary, as we have seen recently.

The creation of super developers is the inevitable outcome of the headwinds being faced by the construction and building sectors and is the only way for many to stay in business. However, the industry and those in charge of its oversight need to think carefully about how to support the thousands of smaller firms that are bearing the brunt of this current trend for restructuring.

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