Linden Homes still upbeat five years after buyout

It is five years since Philip Davies led the £73m management buyout of Linden Homes.

Since then the housing industry has been firmly in the spotlight – particularly at the moment, not only because of a weakened housing market and the Barker Review, but also because of a flurry of corporate activity. This has seen the likes of Countryside Properties following in the footsteps of Linden with a management buyout at the beginning of the year, contractor Laing O’Rourke entering the housing business, investor Gerald Ronson circling Crest Nicholson in a hostile takeover attempt, Australian developer Lend Lease buying Crosby Homes, and last week Fairclough Homes being bought by Scottish housebuilder Miller.

Linden has not had that level of drama in the past 12 months. Davies concedes that he has failed to meet all the targets and aims he set for the company back in 2000, but insists that the move from public to private company was a good one. He says that although there will be short-term pressure on margins, the plan for the business is still growth and expansion, and that the Thames Valley market is high on the agenda.

Davies admits that everything did not go exactly to plan after the buyout. In mid-2001 he outlined plans to increase the number of units it produced to 1500-1700 in three years, in order to expand the business rather than just as a means to repay the buyout debt. However, in 2004 Linden built just 1018 units partly because of disposals that reduced capacity.

Davies says that the main reason was something beyond his control: “We’re a little bit behind but that is mainly down to planning. I’m not optimistic [about improvements to the planning system].”

But the planning system is also frustrating to public companies, and Davies feels more comfortable with Linden as a privately run firm, away from the scrutiny of the City: “It’s more comforting in the private arena,” he says. “When you are building apartments, profits are more lumpy so you can’t always satisfy the City with steady growth. We don’t have to meet shareholders’ expectations in the public arena.”

But that is not strictly true. The Bank of Scotland has a 35% stake in the company, while Davies is a 17% shareholder, the chairman Andrew Sells owns 5% and the rest is split between 50 members of staff, mainly at director level but also including Davies’ secretary who has worked for him for many years.

The difference is they are accountable now to themselves, and to the Bank of Scotland with which they have a good relationship. They are no longer accountable to faceless shareholders.

Davies also believed that turnover would rise, which it has, to £240m in 2004 and that margins would improve, which is proving more of a challenge. Davies says that the short-term aim is to increase sales, and that the effect of that will be to reduce margins. “In the medium term we do need to improve our margins. At the moment we are achieving 16-17% whereas we would expect them to be over 20%.”

We don’t have to meet shareholders’ expectations in the public arena

Philip Davies, chief executive

Linden is therefore focused on lowering costs, but is taking a long-term approach: “Everyone gets a reputation with subbies for being good or bad and therefore if a company is not organised subbies will factor that into cost. Once you can crack that vicious circle, it will eventually spin off in lower costs so that’s a focus.”

But with plans to increase annual units from 1100 to between 1300 and 1600, potentially pushing turnover up to £300m next year, margins will be under pressure. “We won’t get to a 10% profit on that, but that is the aim,” says Davies.

He says that turnover in 2005 will be about £250m and he estimates that underlying pre-tax profit will be about £22m, although that will be hit by interest payments on the buyout debt.

After the recent flurry of corporate activity in the housing sector, Davies says that the majority of deals that are going to happen have happened. Linden has earmarked the Thames Valley, from Slough and west to Oxford, as a place for expansion. The company is also looking at Essex and parts of Hertfordshire, as well as east of its headquarters in Caterham, Surrey.

Linden already has sites and two people on the ground in Reading, Berkshire, with the aim of spearheading a Thames Valley business from the town in the next 12-18 months.

“We would look at acquisitions but there are no obvious targets so we are quite happy to do it organically,” he says.

Davies says that “we are on a bit of knife edge” when it comes to the general state of the UK market. “It is all about disposable income,” he says. “Is the Treasury going to have to raise taxes next year? If so, people will not want to take on bigger mortgages and the end results is that it rubs off on confidence.”