It was therefore predictable that shares in Crest Nicholson (CRST) took a hammering when the housebuilder warned that margins would flatline for at least another year, falling to the lower end of the 18-20 per cent target range and down from 20.4 per cent in the year to October 2017.
But there are two key points to remember. The first is that Crest sells around a third of its houses with an average selling price of more than £600,000 and therefore above the limit applying to the use of Help to Buy. Sales have a greater dependency on the second-hand market, but transactional volume here remains in the doldrums. There is as yet little to suggest that this squeeze on margins will apply to new homes costing a lot less.
The second point is that although margins are expected to flatline, revenue will continue to grow (as will profits) because unit completions are still rising, by 17.6 per cent in the case of Crest for the six months to April. So there is little to suggest that buyers will go on strike and drive prices significantly lower. This only occurs when economic turmoil results in a big rise in forced sellers, notably when interest rates climb sharply or at a time when unemployment is rising. At this point, potential buyers sit on their hands and wait to pick up a property when there are signs that house price deflation has moderated or ended.
Protecting margins can be achieved by reducing the cost base, but this might not be easy and will take time. The second option is to focus more on areas where pricing pressure is less pronounced – in other words, building cheaper houses. Again, this change will take time.
There is, however, a third option; one recently announced by Taylor Wimpey (TW.). In the light of what Crest Nicholson has said, Taylor Wimpey’s aims provide a complete contrast. The aim here is to deliver increased growth, higher dividends and a better return on capital through better use of its existing land assets. Crucially, margins are targeted to be maintained at 21-22 per cent. One of the key factors that could help to make this all possible is Taylor Wimpey’s decision to reduce the length of the short-term owned and controlled land bank by one year to the equivalent of 4-4.5 years' output. This decision is based on what Taylor Wimpey sees as an improvement in the land and planning environment, which means there is less need to carry a long land bank because the planning process has speeded up. That’s a moot point, and certainly one that Berkeley Group (BKG) disagreed with in a recent trading statement. Even so, Taylor Wimpey is positioning itself to build on larger and more complex sites in locations where people want to live. This will be helped by investing in skills, currently still a constraint on significant increases in output, and supply chain development. It has also instigated a cost and efficiency review to effect improvements through every stage of the building cycle.
On the dividend side, from 2019 these will increase from 5 per cent to 7.5 per cent of group net assets, which equates to a rise from £150m to £250m. This will remain a target even if average selling prices fall by 20 per cent and volumes by a third. Apart from operational efficiencies, the main contributor in terms of cash to make this possible will be the reduction in spending on the land bank. In 2017, pre-tax profits rose to £834m, although this was trimmed by £130m, reflecting a one-off provision to resolve the sale of leasehold properties. In the same period, it spent £646m on buying land. Given that completions in that year were nearly 15,000, the short-term land consented bank stood at 75,000 with another 117,000 in the strategic land bank, leaving plenty of room to reduce spending on land.
