Construction Economics: Barratt Development Public Limited Company - Research Paper Example

Construction Economics Table of Contents Table of Contents 2 Introduction 3 Macroeconomic and Microeconomic Scenario 3 Costs Related To Building Large Number of Houses 4 Costs Related To Building Small Number of Houses 5 Recommendation 6 Conclusion 8 References 9 Introduction Barratt Development Plc. is one of the leading house builders in the UK since 50 years. The aim of the company is to develop houses and communities for the people to live. The potential objective of the company is to provide houses to people as per their demand and are involved in developing houses in not only cities, but also in rural areas. Barratt aspires to provide houses with enhanced quality in every sector of the market. Barratt is developing large buildings for housing, retail as well as offices. Aim of the business is to apply the concept of best practices and work for the benefit of the customers. Strategy of Barratt is to acquire land for establishing houses such as standalone and more for greater sustainability in the market (Barratt Developments PLC, 2015). In this context, the paper intends to plan for the next two years where the company needs to analyse the situation best suited. The paper will analyse whether Barratt should construct smaller houses or rely on the land bank for the future two years. Macroeconomic and Microeconomic Scenario Success of business depends on various aspects such as the macro and micro scenario the company is operating in. With regard to the housing industry, it can be stated that the success and efficient decision making with regard to the performance of business depends on several aspects. Building of houses depends on the potential of the market and the capabilities of the company. It is witnessed that Barratt is a large house builder having high potential in the market, as it understands the market requirements. Micro factors that lead to the success of the housing builders are the location, plans, orientation as well as building layout and size. On the other hand, the macro factors affecting the industry include the government policies, financing, labour cost and market potential. The conditions of the UK market have been identified to be unstable to a certain extent due to the rise in prices and potential political uncertainty (KnightFrank, 2015; Bunn & Rostom, 2014). Housing prices depend on factors such as economic growth, rate of interest, employment, consumer confidence and important aspect of supply and demand. Costs Related To Building Large Number of Houses Construction of large houses depends on various facets of the economy. With regard to Barratt, if the company decides to construct new large buildings, then the opportunity cost will be considerably high. The reason being for the construction of the large building, that company has to increase their land bank and need more financial aids. Furthermore, as per the market situation, it is observed that the sale of large buildings will be reduced to an extent due to the potential shift of the market economy. As per the current situation of the UK market, lower growth has been witnessed by the economy. This is affecting the affordability of the people and restraining them for purchasing large buildings. Moreover, from the microenvironment point of view, the potential of the company to purchase land will vary on the macro environment (Adil, 2006). The rising interest rate and slowdown of the economy will be regarded as the risk for building large housing. By providing only large house, the sales of the company depend on the potential or financial condition of people and the economic growth. The opportunity cost is high when considering large buildings. Moreover, the demand for the housing is not very high and the labour costs involved for the construction of large housing is wide. This will tend to increase the cost of the building. From the concept of demand and supply, it can be reflected that as the price of the large houses are more, the demand for the same will be reduced (Adil, 2006). In this predetermined context, if the supply is high, then the cost related to the building will have to be lowered that would affect the profitability of Barratt (CBI, 2014). With regard to larger housing, the purchasing power of people of the UK is not high and therefore, the demand for larger houses is recognised to be declining potentially. Costs Related To Building Small Number of Houses Barratt, if focuses on constructing small number of houses, then the potential aspect will be that the company will be able to construct the houses with the land bank it posses. This will help in lowering the opportunity cost. As stated that the market potential of people has lowered therefore, the availability of smaller houses will help people to invest. Affordability of people will increase, as the houses will be less expensive as compared to the larger one. Moreover, it is observed that Barratt focuses on meeting customer needs and as per the current economic condition and market potential, developing small number of houses is worthy as people will be able to bid efficiently. Moreover, it is observed from the market analysis that the house prices are increasing and demand for the houses are more as compared to the supply (Adil, 2006). Therefore, Barratt can take this as an opportunity and construct small numbers of houses to meet the growing demand and earn profitability. In addition, it is predicted that the population is to reach a newer height in the future and therefore, providing smaller number of houses would be a wise decision to take. From an economic perspective, it can be stated that demand for smaller houses is more, but the demand is less. Therefore, by focusing on building smaller houses would be a potential option for the business. Barratt has the land bank and by focusing on small houses, the opportunity cost would be reduced considerably. This aspect will help Barratt to offer houses at a lower price than the other companies and accordingly, will be facilitated with the opportunity to enhance profitability. From the economic perspective, it can be stated that providing smaller houses at a reasonable cost will help in providing the customers the opportunity to buy houses. In this respect, according to Crown (2014), it has been observed that Government of the UK invested about £525 million for the ‘smaller housing schemes’, which directly affected the housing industry. In this context, it can be stated that with the investment to be made, the rate of interest for purchasing smaller houses reduced efficiently. This increases the purchasing power of customers, as the government helps people in purchasing smaller houses (Adil, 2006). This action of the UK government also increases the demand for smaller houses, which would be effective for Barratt in the future to perform operations in a sustainable manner. Recommendation After analysing the entire aspect of Barratt and the economic as well as market scenario based on micro and macro environment, a proper advice can be provided. It is advisable that Barratt depending on the current market scenario needs to focus on the smaller houses in order to gain profitability and market share. If the company constructs smaller houses, then it will have lower opportunity cost, but will help in gaining profitability depending on the current market scenario. Furthermore, the help from government to enhance the purchasing power of people towards smaller houses can prove to be effective for Barratt in the coming two years. Barratt is in this industry for a long time and has land bank, which can prove to be an effective asset when thinking of constructing smaller houses. In this context, it is worth mentioning that the company will not need to buy new lands, but can use their owned land for constructing houses. Therefore, the cost of the houses will be considerably lower, which will again give rise to demand and help in earning profitability. On the other hand, when thinking about the larger houses, it is advisable for the company to not to focus on larger investment, as it would give rise to higher opportunity cost based on both micro and macro environment. Furthermore, the macro environment with regard to larger housing is not supportive in the present day context due to the aftermath of the current recession in 2008/09 and hence, advisable not to focus on that aspect. For the next two years, it is advisable that Barratt focuses on the smaller houses because of the low opportunity cost, high demand and higher purchasing power of consumers. From the economic perspective, it can be stated that if the purchasing power of people will be high, then there will higher demand and with proper supply of houses to meet customers’ need and accordingly, Barratt will prove to be effective in meeting the demands of the customers, which in turn will enhance profitability (Adil, 2006). Thus, it is recommended that Barratt should focus on meeting customer demand by providing smaller houses for the two years. Conclusion Success of a business depends on the external and internal environment. From the provided scenario, it has been observed that Barratt is regarded as the top most house builders in the UK. However, due to the economic environment, the company is in a dilemma regarding making effective decision. By analysing the aspect of demand and supply and the market changing potentials, a decision is recommended. It is recommended that the company for the next two years can focus on constructing smaller houses. The government have supported this venture by providing higher investments for smaller building scheme thereby increasing the potential of buyers towards smaller building. Continuing to construct larger building would affect the business potential and profitability. The macro environment analysis of the UK revealed the fact that the market potential for larger building is low. References Adil, J.R., 2006. Supply and Demand. Capstone. Barratt Developments PLC, 2015. Business Overview. About Us. [Online] Available at: http://www.barrattdevelopments.co.uk/barratt/en/aboutus/overview [Accessed April 18, 2015]. Bunn, P. & Rostom, M., 2014. Household Debt and Spending. Quarterly Bulletin. [Online] Available at: http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q304.pdf Accessed April 18, 2015]. Crown, 2014. New Investment To Help Smaller Housing Schemes Get Britain Building. House building and Housing. [Online] Available at: https://www.gov.uk/government/news/new-investment-to-help-smaller-housing-schemes-get-britain-building [Accessed April 18, 2015]. CBI, 2014. Housing Britain. Building New Homes for Growth, pp. 3-29. KnightFrank, 2015. UK Residential Forecast & Risk Monitor. Residential Research, pp. 2-7. Read More