Built Environment & Industrials: is UK residential construction an attractive market for Private Equity?

With a theoretical housing shortfall of over 4 million homes, and the new Labour government pledging to build 1.5 million more during its term, UK residential construction might appear ripe for private equity investment.

However, the rest of the picture is much less positive, with UK housebuilding facing numerous challenges in both supply and demand.

On the supply side, in 23/24 new home starts were at their lowest level for over 10 years, due to interest rate hikes, the high cost of materials, ongoing planning bottlenecks, and tightened building regulations. There is also a significant shortfall of workers in the construction industry which has led to labour supply issues and rising wages further squeezing margins.

On the demand side, slow growth in real wages along with rapidly increasing house prices and higher interest rates have led to a decline in mortgage affordability. New builds are also typically more expensive than existing properties, making them less attractive to cost-conscious buyers.

House prices are yet to really respond to these pressures, partly due to higher supply costs necessitating keeping prices high, and partly due to prices being propped up to a degree by new buyers receiving help from ‘the bank of Mum and Dad’.

Considering all this, it is unsurprising that most commentators believe Labour’s housebuilding targets are unrealistic. Whilst the likes of the CPA do expect an increase in new home starts as interest rate pressures ease, a rate of 2-3% seems much more likely than the double-digit growth required to meet Labour’s targets.

So, what does all this mean for UK private equity? While sentiment is improving and select subsectors may benefit from easing rates, the broader residential market remains low-growth, margin-constrained, and highly sensitive to macro shifts.

Overall, it is Armstrong’s view that other areas of construction (e.g. refurbishment, retrofit, infrastructure) are likely to be much more robust, higher margin, and ultimately more attractive over the next five years.

To explore opportunities and risks across the UK construction landscape, contact:

Matt McNally

mmcnally@armstrong-ts.com
+44 7894 736 523