Tap into Vistry's affordable growth prospects

Formerly Bovis Homes, Vistry is in much better shape than three years ago. In 2016 and 2017, it had to spend an aggregate £10.5m on improving customer service after its Home Builders Federation (HBF) rating – a gauge of customer satisfaction – fell to just two out of five stars in 2016. Increased costs contributed to the statutory operating profit margin declining from 17.3 per cent in 2015 to 11.8 per cent in 2017. Having modified its land acquisition strategy and reduced building costs, the margin has gradually recovered, coming in at 15.9 per cent last year. Meanwhile. the group scored a five-star HBF rating. The operational improvements are also reflected in its return on capital employed, which increased from 13.7 per cent in 2017 to 22.3 per cent in 2019. 

But the Covid-19 pandemic and subsequent drop in housing market activity presents a major new challenge. Real estate services group Savills (SVS) forecasts that UK housing transaction volumes will fall by 34 per cent this year compared with 2019, while sales prices are expected to drop by 7.5 per cent. However, government support should underpin demand for affordable housing. Back in March, chancellor Rishi Sunak expanded the budget for the next five-year affordable homes programme – due to commence in 2022 – by £3bn to £12bn. That bodes well for Vistry with the Galliford Try deal increasing its exposure to the affordable housing market.

Revenue from affordable housing completions came in at £170m in 2019, equivalent to 15 per cent of the total. Analysts at Liberum expect that the partnerships and regeneration business alone to account for 30 per cent of sales this year following the Galliford Try acquisitions. Even in the midst of the pandemic, Vistry has continued to sign partnership deals. In April, the group exchanged contracts with Homes England for six developments totalling more than 570 houses, of which almost three-quarters are affordable homes. It also secured two further contracts with registered providers for 810 affordable houses.

The £1.1bn Galliford Try deal was funded through the issue of £675m of new shares to the seller, a £157m placing, a new £100m term loan and Vistry’s own cash resources. It also entailed the transfer of a £100m unsecured loan. Together with reduced activity during the Covid-19 lockdown, the group therefore swung from a net cash position at the December year-end to £476m of net debt in mid-May. With £770m of committed banking facilities, Vistry has £294m of liquidity and, based on calculations by Liberum, this would cover its overheads and fixed site costs for just over 10 months even if there was zero sales activity. 

That should prove academic now that work has resumed. The partnerships business has returned to over 70 per cent of production capacity and 119 out of 172 housebuilding developments are up and running. While sales were severely depressed between the end of March and beginning of May, the sales rate improved to 0.26 over the three weeks to 20 May. Admittedly, that is still well below the 2019 average weekly sales rate of 0.58 per site.