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CNinsight100: Housebuilding’s players err on the side of caution

The lack of change at the top of the CNinsight housebuilders table reflects a stabilised market, albeit at a significantly lower level than before the recession.

It remains a difficult trading environment and the major players have been cautious in their approach, focusing on mix and margins instead of chasing volume.

With radical changes to the nation’s planning system well under way and the government’s shared equity scheme FirstBuy kicking in this autumn, it might be reasonable to look to the next 12 months with a sense of cautious optimism.

But Panmure Gordon analyst Rachel Waring is not predicting an upswing in numbers.

“Housebuilders are not capable of building the same number of homes as they did in 2007, given the amount of staff laid off and the closure of sites and offices,” she says.

“Clearly the market remains dominated by the larger, quoted players and these remain restricted by what shareholders would prefer them to do: retain pretty robust balance sheets and have a softly softly approach to supply and matching it with the pace of demand.”
Listed housebuilders will maintain volumes thanks to the FirstBuy scheme, Ms Waring says. “This should protect their volumes, and therefore turnover, a little more than those who don’t appear to get as good a deal.”

Mortgage woes

Recent turmoil in the eurozone and the widely predicted credit tightening that could ensue will bring new challenges for the battered sector. Most housebuilders continue to cite the lack of mortgage finance - particularly at higher loan to value and for first-time buyers - as the biggest drag.

John Charcol senior technical manager Ray Boulger believes the eurozone crisis presents a further threat to mortgage availability. He predicts a fundamental change, with either countries leaving the euro or the currency collapsing, with potentially serious consequences for housebuilders.

“If the banks don’t trust each other then interbank lending will be a problem and the availability of mortgage finance will certainly get worse - maybe significantly worse.”

Top 20 Housebuilders

Click table for further analysis

The turmoil follows several months of steady improvement in the mortgage market, with a number of building societies introducing higher loan-to-value products.

Saffron Building Society has led the way with a 95 per cent loan to value and the local authority mortgage scheme - a mortgage indemnity product - is growing rapidly.

Ms Waring predicts a significant increase in volumes will follow - “but not now”.

“I would expect the majors to be the main beneficiary because with their decent balance sheets they’ll have the firepower for investment,” she says.

The outlier she identifies is Galliford Try, which bolts into the top 10 of the CNinsight table despite a rise in turnover of just 3 per cent.

Panmure Gordon forecasts the company hitting revenue of about £385 million in housebuilding for the year to June 2011.

“There is a fundamental shift to transform the business into a much larger housebuilder and, given its desirable positioning in the South and South-east, this is likely to play out, regardless of market conditions.”

Our biggest faller in the table, Miller Homes, slides out of the top 10 after turnover fell by 9 per cent, and pre-tax losses have increased.

Fairview has dropped out of the table this year due to turnover crashing to less than half the £224m in the previous year.

The end of shared equity?

Barratt turned heads by becoming the first major housebuilder to confirm it was in talks to sell off parts of its shared equity loan portfolio - believed to be worth about £170 million.

Its statement to the stock market confirmed it “is in the early stages of looking at options to monetise part of its interest in this portfolio” but added there was “no certainty that any transaction will be concluded”.

Speculation has mounted about whether other housebuilders might follow and what the move suggests about Barratt’s reading of the market. It saw the biggest fall in turnover - 11 per cent - across all the CNinsight top 20 housebuilders this year.

John Charcol senior technical manager Ray Boulger says: “The fact that Barratt want to sell suggests either the balance sheet constraint means it needs to or it thinks it’s a good time. Bearing in mind Barratt has got an equity stake in these properties, it is interesting to see their expectations of what house prices are going to do.”

The era of shared equity could soon end due to changes in how the market is regulated, coming under the scrutiny of the Financial Conduct Authority - succesor to the Financial Services Authority.

Mr Boulger says: “In two or three years builders will not offer shared equity because getting authorisation from the FSA is very different to the OFT. It has typically taken a year to get authorisation and I suspect most will not want to go through that process.”

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