Countryside: more than houses

Other housebuilders are operating similar schemes, but whereas broker Peel Hunt estimates the sector's exposure to the private housing market at about three-quarters of sales, for Countryside it is less than two-fifths for the coming year. And growth in the the partnership side of the business is expected to reduce this still further to 35 per cent. This should cushion it against a deteriorating private housing market.

Building on land owned by a local authority provides attractions for both sides. Countryside doesn’t have to commit as much capital as would be needed on a conventional building scheme. Meanwhile, the local authority partnership construction gets to achieve building targets without taking on the full risk or expense of construction. On such projects, output tends to be divided fairly evenly between affordable housing, private sales and private rental. The local authority also gains thanks to the increase in council-tax revenue and savings made from not having to house as many families in expensive bed-and-breakfast accommodation.

The financial benefits for Countryside have been significant. In the year to September 2018, operating margins hit 17.2 per cent. And based on our calculations, return on average capital employed (ROCE) came in at almost 25 per cent last year (these are based on a more conventional calculation of ROCE than the one used by the company, based on net tangible assets that give a 37 per cent return). True, last year may mark a cyclical peak for margins, with Peel Hunt forecasting a return to about 16 per cent due to a slowdown in house price inflation and ongoing input cost inflation of 3-4 per cent. However, the company is investing in efficiencies that should help prop up ROCE.

Specifically a new off-site manufacturing facility has been opened in Warrington, which could help reduce onsite unit build times by about a quarter. The facility adds to the open-panel timber frame system that already produces standard components for 40 per cent of its output. The new factory will produce wall and flooring systems with plumbing and electrical channels already installed. Walls will have windows in place and insulation sealed into the unit. The new facility will ultimately produce components for around 1,500 units a year.

The partnership scheme has been widely welcomed as a means of accelerating the supply of affordable homes, and Countryside increased completions by 38 per cent in the year to September to just over 3,000. And its existing land bank, together with land associated with being a preferred bidder, comes to nearly 30,000 plots. Reservations in the new financial year continue to grow, and Countryside expects completions this year to be up about 30 per cent.

Some of this growth will be thanks to the £135m acquisition of Westleigh in April 2018. This is a long-established partnership home builder and brought with it around 5,000 plots, and in the year to September 2018 it contributed 465 affordable homes.

Outside the partnership division, private completions rose by 7 per cent to 1,276 homes. Of these, private sales grew just 3 per cent to 858, while affordable completions were up 16 per cent at 418. This remains an efficient operation, as operational savings pushed adjusted operating margins up from 16.6 per cent to 18.4 per cent. The land bank is being managed on a top-up basis and the 1,334 plots acquired left it it little changed from a year earlier at 19,778.

While the model is capital-light for a housebuilder, expansion still requires significant working capital and growing active sites from 88 to 115 last year meant a £83m increase in inventory to £750m. Still, Countryside ended the year with net cash supporting its investment plans. As well as using its resources to buy Westleigh, it aims to expand its relationship with Sigma Capital in the north west and the Midlands, so that the 2,000 completions already achieved will be expanded by an additional 5,000 units over the next three years.