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Hope for volume house builders

THE LARGER quoted house builders were offered a crumb of comfort last week in a financial health check* on the sector by credit agency Fitch Ratings.

Surveying the gloom surrounding the sector, the agency said that, while the industry has enjoyed a boom since late 2001, evidence now points to a cooling down.

While the risk of a crash is low, the risks are mainly on the downside and house builders face lower prices and volumes, thinner margins and potentially weaker cash flows over the next couple of years.

Yet Fitch looked at the four largest volume house builders - Barratt Developments, Wimpey, Persimmon and Taylor Woodrow - and concluded that they have reasonably healthy financial profiles which should enable them to weather a moderate downturn.

Since 1999 these four have increased their average selling price by 55 per cent to £169,000 and their combined volumes from 32,000 to 50,000 homes with underlying margins rising from 12 to 17 per cent - although Persimmon's are higher.

But they have also increased the average length of their land banks to 3.8 years' supply, which Fitch says may provide some protection as land prices turn.Borrowings have moderated, with average net debt/ ebitda standing at 0.9, down from 1.2 three years ago. Interest cover is also strong.

Faced with a slower market, house builders can act to boost incentives and advertising, cut land buying and reduce labour costs.

Yet Fitch calls for more mergers in the sector, arguing for consolidation to enable larger house builders to manage costs and generate scale economies. It also warns of a changing political climate.

To achieve the higher volumes called for in the Barker Report, the industry needs to embrace off-site manufacturing and other innovations. Fitch points to signs of Government impatience, which could bring unfavourable initiatives or the creation of alternative housing providers.

* The Weakening Outlook and Growing Political Risks facing UK Housebuilders