Leading housebuilders buck trend for falling prices

Housebuilders have re-shaped their businesses and are set to benefit from higher average selling prices in 2011.

A number of leading housebuilding firms, including Persimmon, Barratt and Miller Homes, have been updating the market this week, before releasing their results over the next couple of months. Each of the firms has benefited from increased average selling prices, with Barratt doubling its operating profit margin in the first half of its financial year.

Despite house prices falling by 3.4% in the year to the end of December, according to the Halifax house price index released this week, Persimmon increased its average selling price by 6%, to £167,000, during 2010, while the average price of private houses sold by Barratt increased by 11% to £192,000. This rise was driven by changes in sales mix, as firms sold more houses than apartments.

In the first week of 2011, sales were roughly 10% ahead of the same period last year

Mike farley, Persimmon

“We have been building more houses,” said Persimmon chief executive Mike Farley, “and this will be a theme again during 2011, where we expect flat house prices, but our own average selling price should increase by around £5,000.”

A similar trend will also boost Barratt selling prices. Chief executive Mark Clare said: “This trend will continue into our second half but the rate of growth will slow down. Underlying house prices should be stable.”

Several firms have repositioned their business, with less reliance on first-time buyers, who are still often locked out of the housing market because of high deposit requirements. Many large housebuilding firms are benefiting from activity further up the price scale, as people with equity look to trade up or down the housing ladder.

But housebuilders are still coming up with innovative ways to attract customers. Shared equity schemes are one such method. Keith Miller, chief executive of Miller Homes,
says: “Mortgage availability continues to be the biggest hurdle for our customers, especially for first-time buyers. We have countered this by offering shared equity products.”

Barratt has done the same and 28% of its first half sales were as part of a shared equity scheme.

Many housebuilders look to have decoupled their business from the wider housing market and should see improvements in revenue as 2011 develops.

“So far activity has been encouraging. In the first week of 2011, sales were roughly 10% ahead of the same period last year,” said Farley.

Listed housebuilding firms in the UK are now much stronger financially than they were at the height of the housing boom, when debt levels were higher. Since the onset of the recession, housebuilding firms have repaired their balance sheets and significantly reduced debt.

This has been achieved through rights issues, tight controls on working capital or both.

This improved financial strength means that cheap land can be acquired and as it works its way through the system, margins should improve as a result of lower costs per plot.

Even with activity levels much lower than three years ago, the outlook for the housebuilding sector is not as negative as some would suggest.

This week, Persimmon said its full year profits would be towards the top end of analysts’ expectations, which range from £75-96m, with sales hitting £1.57bn. Barratt’s first half sales topped £875m, broadly unchanged from a year earlier.

Top housebuilders in numbers