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34 PROPERTY
HOUSE OF CARDS
How do the fortunes of UK house builders in
The graph clearly shows just how long and deep the recession was.
the current economic climate compare to the
Sales declined for four consecutive years and sales in 1992 were 26
turbulence they faced in the early 1990s? Gary
per cent lower than they were in 1988. Barratt recorded a loss before
interest and tax of over £80 million in 1991 and Bovis recorded a loss
Hutton warns that developers and house builders
of over £34 million the following year.
should tread very carefully.
Results for house builders leading up to 2007 showed a similar picture
“Without doubt the most difficult year for house builders in the UK in the
to 1988; healthy returns on capital employed, operating margins
last 30 years,” according to Persimmon. Bovis similarly observed, “…a
around 19 per cent and exceptionally strong sales growth. Maintaining
continuation of the deep recession in the house building industry with
the parallel, it all started to go wrong in the second half of the year. But
a further decline in house prices.” Barratt meanwhile are coming off
surely it can’t happen again? After all, to quote Sir Lawrence: “the long
their “…first loss recorded in the group’s history.”
term future of the house building industry throughout Britain is extremely
strong” and there is “a need for a substantial increase in our housing
Gloomy times indeed – but these tales of woe are taken from 1992
stocks” – which may of course be just as true now as it was then, but
rather than 2008.
that didn’t stop five subsequent years of misery for the house builders
and Barratt needing to negotiate with its banks.
Looking at the accounts of some of the major house builders during
the late 1980s and early 1990s suggests that 1991 and 1992 were truly
In the southern region we are finding that the local house building and
the nadir of a prolonged recession in house building which began
construction market mirrors the rest of the sector. The lack of demand
towards the end of 1988. Norman Lamont’s infamous “green shoots of
and fall in house prices means that in a number of cases house
recovery” would not start to emerge until 1993, a full five years later.
builders are finding that they are now working on sites that are no
longer commercially viable.
Indeed, the sentiment in the first half of 1988 was similar to that in
the first half of 2007. On the back of record results in 1988, Sir
Local house builders need to consider on an individual site basis
Lawrence Barratt, stepping down from Chairman and CEO to
whether they should complete the site, moth-ball it or, depending on
become Life President, announced, “I firmly believe that the long
the financing arrangements, look to re-negotiate terms with their
term future of the house building industry throughout Britain is
funders. House builders have seen their profits eroded and can find
extremely strong. In fact, research shows a need for a substantial
themselves developing out individual sites where there is little prospect
increase in our housing stocks.” Three years later he was back again
of a return to the business, with all sale proceeds likely to be used to
as Chairman trying desperately to negotiate with banks over
partially settle outstanding bank funding.
Barratt’s “very serious [debt] problem” and dealing with the false
dawns of a much hoped for recovery.
In the current market, developers need to focus on survival until the
market improves; necessary action may include downsizing and
So how bad were things during the last serious downturn? The following
closing sites. It is essential that in such circumstances, the developer
graph illustrates the sales growth, operating profits and return on capital
speaks early with its bankers to find a solution. If a development is in
employed of some of the UK’s largest house builders during this period.
excess of half built, normally it will make commercial sense to
complete the development but, from the house
builders perspective, it may not be
commercially viable. In such situations, it is vital
that the developer keeps the bank up to date
on the project and also seeks to renegotiate
terms.
The lack of demand in the market means that
developers will need to consider alternate routes
for disposal. This may include housing
associations and residential investors. Developers
should also consider letting the completed units
for the short to medium term or discussing with
their bankers their willingness to put together a
mortgage arrangement for potential purchasers
of the site.
Source:
Gary Hutton, BDO Stoy Hayward, Gatwick
gary.hutton@bdo.co.uk www.bdo.co.uk
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