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Persimmon's Profit Pees On Parade?


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Persimmon's CEO on the radio pre-announcing 2004 results:

Average selling price forecast for 2005 will be slightly up on last year, £1Bn of sales YTD, strong performance in the West country and elsewhere in the UK.

"We are at the coal-face, we know what is happening in the market. A lot of negative comment is coming from people in the media who are quite far removed from the market." (quote from memory).

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I heard that too, driving in to work.  It sounded like a different market he was describing.  Either we're very wrong or he is.

That doesn't follow. I am considerably less bearish re successful housebuilders than re house prices generally, and have even considered renently buying shares in PSN and other leading listed housebuilders.

The fact is that if you produce good new houses and market them well you are likely to outperform the market generally. So PSN's success is not a good proxy indicator for the housing market as a whole.

There's even a scenario you can construct whereby the success of housebuilders in selling new houses depresses the wider market, as sellers of "second-hand" houses find it increasingly hard to sell and have to resort to price cuts to shift their stock.

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Another point:

The reason housebuilders are reporting strong profits is simple, they are selling houses at vastly more than they cost (50% profit margin is not untypical)

Put another way, they can afford to see prices fall substantially and still make a profit. And of course if they have to cut prices to keep selling they will. I'm sure they have scenario planned for substantial fall** in house prices and will aggressively cut prices if need be.

** my guess would be that they are working on 20% fall as best estimate, but that most could live with 30% falls or even a little more.

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How much land are the builders spending their money on?

Are the profits coming from sales agreed in the last few months or a combination of recent sales and ones from orders and deposits placed months/even years ago when BTL was rampant?

How much of the slow build rate over the last few years was due to builders holding back supply whilst sales prices continued to rise? Are they now busy slapping up and selling as much as they can (at reduced prices but still at massive profits). Will this be a one-off pruple patch?

Just a few questions.

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Another point:

The reason housebuilders are reporting strong profits is simple, they are selling houses at vastly more than they cost (50% profit margin is not untypical)

Put another way, they can afford to see prices fall substantially and still make a profit. And of course if they have to cut prices to keep selling they will. I'm sure they have scenario planned for substantial fall** in house prices and will aggressively cut prices if need be.

** my guess would be that they are working on 20% fall as best estimate, but that most could live with 30% falls or even a little more.

Spot on Y.

When i bought my 3 bed semi oct 99 it was for 63k and i even negotiated some extras eg: 2k worth of carpet fitted throughout and the better kitchen instead of the bog standard one they were offering, now people who bought off plan they paid 53-55k and the buliders still made a hefty profit.

The same house built now 165k with no incentives whatsoever as th :angry: ey don't need to offer any as they were selling anyway.

GREED, PLAIN AND SIMPLE. :angry:

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How much land are the builders spending their money on?

Are the profits coming from sales agreed in the last few months or a combination of recent sales and ones from orders and deposits placed months/even years ago when BTL was rampant?

How much of the slow build rate over the last few years was due to builders holding back supply whilst sales prices continued to rise? Are they now busy slapping up and selling as much as they can (at reduced prices but still at massive profits). Will this be a one-off pruple patch?

Just a few questions.

As regards land, I believe that many housebuilders haven't actually bought the land as such but instead use options to purchase, thus protecting themselves against a downturn (they can go back and renegotiate a lower land price if need be, thus helping preserve their profit margins). Where they have bought the land themselves, in many cases it will be a few years ago, so at a lower price than now, so again they have some margin protection. Again, these factors mean they can afford to reduce their selling prices at least for a time without feeling too much pain.

As regards profit make-up, as you say, it will be a mixture. The precise mix is likely to vary from builder to builder and may be lumpy if they have particularly large single developments coming on track, though they will do their best to smooth things out (see next answer).

The slow build-rate probably has more to do with capacity issues than anything else- if they built at too rapid a rate then they would bid up labour and other input costs and thereby erode their margins. However, they would also manage their supply stream to smooth out the lumpiness mentioned above. Also, they wouldn't want to supply too much at any one time if that could depress the market. ideal scenario is a steady stream of sells at a high margin with low downside risk. Most of the big builders seem to have achieved that thus far.

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Yonmon,

it would be interesting to see some new build statistics. I don't think that the building industry is quite as constrained as it like to make out, although I believe that some situations can have knock on effects. Rapid escalation in pricing has put many off moving and upsizing at all - affordability/stamp duty costs, instead of moving a lot of those have extended instead using up significant numbers of available trademen.

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Also worth remembering that Berkeley Homes- one of the most successful housebuilders of recent times - announced last year that it would sell the vast bulk of its land bank (est. worth £1.5bn) and return the cash to shareholders. Obviously they took quite a different view on the market's prospects...

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Remember when Gerald Ratner described his jewelry as rubbish? And the Barclays boss said he wouldn't use a credit card? Two very rare but refreshing points of view from CEOs, both true and sensible.

The Persimmon boss is well paid to talk up the prospects for the business and the product it sells.

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Builders are making hay right now, as Yonmon says, because they can undercut current OOs when selling, and there are no upward chains involved. Don't get me wrong, I think builders will be in trouble, but they'll lag the general market, just as they did in the last crash.

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Remember that housebuilders are reporting figures based upon sales largely from the previous year. As a result they will lag the actual market considerably.

Agree there. You can see this from what happened to house builders share prices in the last crash: the peak was in 89 but the housebuilder share prices only plunged in 90-91.

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Also worth remembering that Berkeley Homes- one of the most successful housebuilders of recent times - announced last year that it would sell the vast bulk of its land bank (est. worth £1.5bn) and return the cash to shareholders. Obviously they took quite a different view on the market's prospects...

Agreed up to a point. Some cynics think the Berkeley's "run for cash" restructuring has more to do with the huge personal gains its Directors stand to make thereby, rather than any market imperatives. However, I do think they would have a slightly different plan if they believed the bull market would continue as in past few years.

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Builders are making hay right now, as Yonmon says, because they can undercut current OOs when selling, and there are no upward chains involved. Don't get me wrong, I think builders will be in trouble, but they'll lag the general market, just as they did in the last crash.

No upward chain and no downward chain either if a housebuilder takes part exchange, though interesting to see Wimpey recently stop taking part-ex, which perhaps gives a clue where they think the market is heading.

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