Sunday, 21 December 2014

Margin call

From: Inside edge

Britain’s housebuilders are starting to do very nicely thankyou. If only the same could be said for housebuilding.

A succession of leading firms have revealed healthy results in the last two weeks featuring increased profits and margins, reduced debts and in one case a £1.9 billion dividend for shareholders.

The strategy in all cases is pretty much the same: increase margins through tight control of costs, building on land bought at cheaper prices since the downturn and building more houses than flats and more in the south than the north. The one thing they are not doing is increasing production. As Taylor Wimpey sums it up in its results today: ‘Our priorities remain value creation and margin improvement ahead of volume growth.’ Here’s a brief selection of the highlights from the results of five of the top 10 firms:

Taylor Wimpey: Profit before tax and exceptional items £89.9m in 2011 (2010: £27.9m loss). Achieved double-digit operating margin ahead of 2012 target with 10.1 per cent in H2 2011. Resumed paying dividend. Completions up 2 per cent to 10,180 of which 8,075 were private and 2,048 affordable.

Barratt: Interim pre-tax profit for six months to 31 December £21.6m in (2010: £4.6m loss). Operating margins up from 5.0 per cent to 6.4 per cent.  No dividend. Now operating from 400 sites with capacity to go to 460 active outlets ‘as a maximum – but this will only happen if market demand supports it’. Completed 5,117 homes jn first half (4,796) of which 1,089 were social housing and 545 supported by FirstBuy or HomeBuy Direct. Looking to take advantage of ‘build now, pay later’ initiative.

Persimmon: Underlying pre-tax profits up 55 per cent to £148.1 million for 2011. Operating margins up from 8.2 per cent to 10 per cent. Dividend up 33 per cent and programme to return £1.9 billion to shareholders over next nine years. 9,360 completions in 2011 (2010: 9,384).

Redrow: Interim pre-tax profit for six months to 31 December 2011 up 80 per cent at £15.3m. Operating margin up from 5.6 per cent to 7.5 per cent. Completions down 11 per cent at 1,168 following sale of Scottish business. No dividend.

Bovis Homes: Pre-tax profit for 2011 up 74 per cent to £32.1 million. Operating margin up from 7.2 per cent to 10.0 per cent. Completions up 8 per cent to 2,045 homes, of which 21 per cent were social housing. ‘With a clear focus on controlling the capital employed of the Group through rigorous management of the landbank and tight control of work in progress, the Group expects to deliver a strong improvement in returns in 2012 and beyond.’

Between them the top 10 housebuilders dominate the market. The top three (Taylor Wimpey, Barratt, and Persimmon) accounted for at least a quarter of completions in 2007 and about the same now. The top 10 account for around 40 per cent.

Last year saw just 109,000 completions in England. The top 10 are concentrating on building their margins rather than homes. That is a perfectly understandable business strategy given how close they came to annihilation when they expanded output up to 2007. However, it makes the prospects of matching the rate of new household formation (240,000 a year) look bleak for the foreseeable future.

The government is hoping that November’s housing strategy in general and its new mortgage indemnity scheme in particular will help to bridge the gap. I’ll be looking at the chances of success in another blog soon. 

Readers' comments (6)

  • St Alban

    Perhaps it is well over time to ditch Plan A for something that actually resolves the structural problems behind economic failure rather than simply penalises the poorest to raise funds to plug the gaps in a leaking philosophy.

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  • Chris

    Maybe the extra profits for the shareholders will be used to build housing - although I'm not sure the homeless and poor will be able to relocate to the offshore taxhaven they may build it in.

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  • Jon Southall

    Chris/F451/TWIMC/St Alban/Sydney - I see your many personalities are alive and well!

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  • Chris

    Alive, burned out, sulking, dead for centuries, retired - to be precise.

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  • Mike Batt

    'Britain’s housebuilders are starting to do very nicely thankyou. If only the same could be said for housebuilding.'

    Surely it is in the interest of housebuilding that the housebuilders are in decent financial fettle...

    Maybe the article should be more positive that the housebuilders had the skill to avoid going bust altogether.

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  • I wouldn't call 6.4%-10% margins "very nice" or representing any kind of profiteering. The stock market would seem to agree: the share prices for the major housebuilders are barely 10% of their rating in 2008.

    Also, you complain that the Top 10 housebuilders account for 40% of the market: this isn't exactly market dominance. What about the other 60%? What are their margins like, and are they deliberately restricting volume in order to maximise their profits in the way you suggest the Top 10 are?

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