NEW HOMES


LAND AND


losses from £144m to £33m for the financial year (and actually made a profit in the second half), said it was already seeing reservations declining as early as September. It’s always difficult to interpret house builders’ results, as they don’t always reflect quite what is going on in the housing market as a whole. For instance, Barratt saw average prices rise 11 per cent against a stagnant housing price index, but that was mainly due to changes in the product mix. Its unit reservations rose only 4.2 per cent. Barratt had chosen to optimise selling prices, rather than push as much volume as possible, and, according to chief executive Mark Clare, as part of that strategy, the company has been selling more houses, rather than flats. That raises the possibility that we could see the major house builders’ average prices increasing further over the next couple of years even if the UK average price falls, as house builders move up-market to avoid the credit-constrained first-time-buyer market.


Who’s to blame? At least part of the blame for the decline in share prices can be pinned on other data coming out of the housing market. The latest RICS Housing Market Survey showed the market slowing again in October, with all 12 regions of the UK seeing falling prices. Meanwhile September 2010 saw a seven month low in mortgage approvals according to Bank of England figures. However longer term investors are


looking not so much at the month-to- month housing market figures, as at the structure of the house builders’ balance sheets. It’s during the trough that the seeds of the next recovery are born, and specifically, that the land acquisitions are made which should give house builders their margins over the next four or five years. Robin Hardy, house building analyst at


KBC Peel Hunt, has a reputation as a bear of the sector, and so far, he’s been right. But he prefers to see house builders investing their money rather than saving it. “Rebuilding the land bank,” he says, “is the only acceptable way to run a house building company at this point in the cycle.” In fact he’s critical of Persimmon’s focus on debt reduction, which he believes will handicap the company in the recovery, whenever that happens. Several of the other house builders appear to be thinking in line with him.


Rebuilding the landbank is the


only acceptable way to run a house building company at this point.’ robin hardy


Bovis, for instance, started to buy land again earlier this year. By the end of the first half it had added 1,874 sites with planning consent to the land bank in the first half, increasing the total to over 13,000 plots. Berkeley Homes is aiming to grow its land bank by 10 per cent every year, too, obviously attracted by low land prices in a buyer’s market. Barratt, too, has been rebuilding its land


bank. That might be considered surprising given its high debt, but it has introduced deferred payment terms for many of its purchases, so it will only pay out once the properties have been developed. Because Barratt had a fairly slim land bank as the


downturn bit, with only just over 4 years’ plots in the bank, compared to nearly ten, on some estimates, at Berkeley, and nearly seven at Persimmon, its new purchases will rapidly reduce its average land cost. And though few properties built this year will use cheap, recently acquired land, over a third of its properties will probably benefit from increased margins by 2012. Galliford Try CEO Greg Fitzgerald


pointed out recently that the company had announced an expansion of its house building operations at the time it held a rights issue in 2009, and its investment in a larger land bank is part of that strategy. With 58 per cent of its existing land bank acquired at post-credit crunch values, the company should benefit from better margins more quickly than many of the other listed builders. Indeed canny acquisitions give the company the ability to increase its output, and potentially its profits, without having to rely on a general housing market recovery. With a surplus of sellers of land over


buyers, plot prices remain attractive, but it seems that the market has opened up, with a higher volume of transactions than in the past couple of years. The fact that most house builders are now seeing positive cash flow, and are adequately funded for the foreseeable future, also makes acquisitions a more realistic prospect than they were a couple of years ago.


assets, analysts and stocks But what are stock market valuations telling us about the market? The enthusiasm we saw earlier this year has disappeared. Barratt, for instance, hit 145p earlier this year, but has slumped to 75p. Some analysts believe the market has got


Smiley, happy faces when a sale completes but it’s getting harder to achieve.


it wrong. Brokers Panmure Gordon, for instance, point out that Barratt is now trading at half its net asset value. The high asset value is, though, partly the result of Barratt having taken a lower level of write- downs than most of its peers. Even so, a 50 per cent discount does appear too high, and certainly contrasts with valuations in the commercial property sector at the moment, where some stocks are still trading at a premium to their asset value. Jonathan Jackson, head of equities at


stockbrokers Killik, is a buyer of Bovis shares. According to him, a 35 per cent discount to the historic asset value more than discounts any concerns about a weakening residential market. Bellway, too, is trading at a wide discount to its asset value.


PROPERTYdrum JANUARY 2011 19


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