House-building isn鈥檛 like the rest of the construction industry; it鈥檚 more about property and land than the business of building.
Yes, of course, the houses get built. That鈥檚 done by a huge army of contractors and subcontractors. But that鈥檚 not how the so-called house-builders 鈥� the developers 鈥� earn their very considerable crust. Their money is made by selling houses on a market where demand constantly outstrips supply.聽
That鈥檚 why house-building is always the dominant sector in our monthly Contracts League and it鈥檚 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鈥檚 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鈥檛 yet been any decline 鈥� 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 拢30bn-worth of business according to their most recent financial figures. And profits are still generous at nearly 拢6bn.聽
Margins, however, haven鈥檛 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.聽
Although Barratt鈥檚 turnover slipped very slightly from about 拢4.9bn last year to 拢4.8bn in the 12 months to June 2019, its pre-tax profits rose almost 9% to 拢909.8m (2018: 拢835.5m) with margin up two percentage points to 19.1%.
Second-placed Taylor Wimpey performed well with turnover just edging past the 拢4bn threshold and pre-tax profits up by 19% to 拢810.7m (2017: 拢682.m), a margin of 19.9%.聽
However, the biggest pre-tax profit figure, as in previous years, belongs to Persimmon Homes, the UK鈥檚 third-largest house-builder. In the year to December 2018, Persimmon turned over 拢4.1bn and made a pre-tax profit of just over 拢1bn. Its profit margin is almost 30%.聽
Persimmon鈥檚 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 鈥� its CEO Jeff Fairbairn in particular 鈥� and their excessive pay and bonuses. Fairbairn pocketed his 拢75m pay packet and resigned. Well you would, wouldn鈥檛 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聽鈥渟ystemic nationwide failure鈥� to install cavity barriers correctly to stop the spread of fire in its timber-framed houses.聽
These are shocking revelations, but they鈥檙e certainly not unprecedented; the entire house-building sector has a poor reputation for quality in both design and construction. It鈥檚 the contrast between Persimmon鈥檚 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 鈥渋s already embracing the review鈥檚 recommendations in this area through significant operational investment and procedural change.鈥�
He concluded: 鈥淭his review 鈥� and the seriousness that we attach to its detailed findings 鈥� is an important moment for Persimmon as we continue to build a different business with an increased focus on our customers and wider stakeholders 鈥� becoming a business that prioritises purpose as well as profit.鈥�
It will be interesting to see how Persimmon performs 鈥� both financially and operationally 鈥� over the next 12 months.聽
Meanwhile, if Persimmon is the most profitable major house-builder in the UK, Kier represents the other extreme: it鈥檚 the only one of our top 20 to record a pre-tax loss last year.
In the year to June 2018, Kier鈥檚 house-building division made a pre-tax loss of 拢6.5m on a turnover of 拢118.1m. The year before, it had made a profit before tax of 拢16.2m on turnover of 拢175.5m.聽
The business said this 32.7% decrease in turnover 鈥渨as a result of increasing the number of sites transacted via our joint venture partners which is accounted for under equity account methods鈥�.聽
Similarly, a gross loss for the year of nearly 拢10m was 鈥渄ue 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鈥�, 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 鈥� along with Kier鈥檚 property and facilities-management divisions 鈥� 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鈥檚 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 拢1bn. It will more than double the size of Bovis Homes.
Linden Homes and Galliford Try Partnerships & Regeneration together generated revenues of more than 拢1,443m in the year to 30th聽June 2019, making operating profits of 拢195m.聽
In 2018 Bovis Homes generated revenue of 拢1,061m and made an operating profit of聽
拢160尘.听
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