House-building isn’t like the rest of the construction industry; it’s more about property and land than the business of building.
Yes, of course, the houses get built. That’s done by a huge army of contractors and subcontractors. But that’s not how the so-called house-builders – the developers – earn their very considerable crust. Their money is made by selling houses on a market where demand constantly outstrips supply.
That’s why house-building is always the dominant sector in our monthly Contracts League and it’s why the top 20 house-builders consistently rack up the sort of pre-tax profits that the leading players in every other sector of the construction industry can only dream of.
But house-building is a fickle business. It’s great when the economy is on the up and the property market takes off. But when house-prices start to fall, people soon stop buying and the house-builders slam on the brakes. During the worldwide recession a decade ago, UK house-building literally stopped dead in its tracks.
Nothing as dramatic as that looks likely in the foreseeable future, but as we noted this time last year, the vigorous growth that house-builders had enjoyed since the start of the economic recovery in 2012 has slowed noticeably.
This year sees the sector reaching what appears to be a plateau: there has been hardly any upward movement. The average turnover of the top 20 house-builders has grown by just 5.5% and pre-tax profits have inched up by just over 5%. The best we can say is that there hasn’t yet been any decline – but the trend appears to be moving in that direction.
Total turnover for the sector is still enormous: our top 20 companies account for more than £30bn-worth of business according to their most recent financial figures. And profits are still generous at nearly £6bn.
Margins, however, haven’t increased at all and still hover at around 19%, although in relative terms this is out of all proportion to the construction industry in general which, as our Top 100 survey revealed in September 2019, averages just 2.7%.
Also unchanged are the positions of the top three house-builders, with Barratt Developments in first place, followed by Taylor Wimpey in second and Persimmon in third.
Although Barratt’s turnover slipped very slightly from about £4.9bn last year to £4.8bn in the 12 months to June 2019, its pre-tax profits rose almost 9% to £909.8m (2018: £835.5m) with margin up two percentage points to 19.1%.
Second-placed Taylor Wimpey performed well with turnover just edging past the £4bn threshold and pre-tax profits up by 19% to £810.7m (2017: £682.m), a margin of 19.9%.
However, the biggest pre-tax profit figure, as in previous years, belongs to Persimmon Homes, the UK’s third-largest house-builder. In the year to December 2018, Persimmon turned over £4.1bn and made a pre-tax profit of just over £1bn. Its profit margin is almost 30%.
Persimmon’s superlative financial performance is in stark contrast to its record as a builder of new homes and its tarnished public image. Last year, Persimmon was pilloried in the national press for the greed of its senior management team – its CEO Jeff Fairbairn in particular – and their excessive pay and bonuses. Fairbairn pocketed his £75m pay packet and resigned. Well you would, wouldn’t you?
This year, Persimmon is once again in the news following the publication of an independent review into its culture and activities commissioned by the company itself in a bid to identify problems and improve its customer care.
The review (which, to its credit, Persimmon has published in full on its website) reveals that the company builds poor-quality houses and is hopeless at identifying defects and rectifying them. Of particular concern is a “systemic nationwide failure” to install cavity barriers correctly to stop the spread of fire in its timber-framed houses.
These are shocking revelations, but they’re certainly not unprecedented; the entire house-building sector has a poor reputation for quality in both design and construction. It’s the contrast between Persimmon’s stellar financials and the shoddiness of its product that shocks.
The report says that if Persimmon aspires to be a quality house-builder, it needs to make some changes, starting with its woeful lack of effective supervision and inspection.
Chairman Roger Devlin responded by saying that the company “is already embracing the review’s recommendations in this area through significant operational investment and procedural change.”
He concluded: “This review – and the seriousness that we attach to its detailed findings – is an important moment for Persimmon as we continue to build a different business with an increased focus on our customers and wider stakeholders – becoming a business that prioritises purpose as well as profit.”
It will be interesting to see how Persimmon performs – both financially and operationally – over the next 12 months.
Meanwhile, if Persimmon is the most profitable major house-builder in the UK, Kier represents the other extreme: it’s the only one of our top 20 to record a pre-tax loss last year.
In the year to June 2018, Kier’s house-building division made a pre-tax loss of £6.5m on a turnover of £118.1m. The year before, it had made a profit before tax of £16.2m on turnover of £175.5m.
The business said this 32.7% decrease in turnover “was a result of increasing the number of sites transacted via our joint venture partners which is accounted for under equity account methods”.
Similarly, a gross loss for the year of nearly £10m was “due to a greater proportion of our activities now being through the join venture and a one-off impairment of existing mothballed land site values on non-trading sites”, said the company.
Following publication of its group accounts in June, the parent company announced plans to restructure and focus on its traditional core businesses of construction and civil engineering. Kier Living – along with Kier’s property and facilities-management divisions – was put up for sale.
At the time of writing, no buyer had been announced, though two private equity investors, Lone Star and Terra Firma, were both believed to be in the running.
A more significant upheaval in the sector is the imminent merger of Galliford Try’s house-building business, Linden Homes (number 12 on our list of top 20 house-builders), with Bovis Homes, currently at number nine.
This deal, which was agreed in November 2019, will see Linden Homes and Galliford Try Partnerships & Regeneration sold to Bovis for just over £1bn. It will more than double the size of Bovis Homes.
Linden Homes and Galliford Try Partnerships & Regeneration together generated revenues of more than £1,443m in the year to 30th June 2019, making operating profits of £195m.
In 2018 Bovis Homes generated revenue of £1,061m and made an operating profit of