There aren’t many businesses where your product rises in price even while you’re making it. But over the past year that has been the lucky lot of most housebuilders. No wonder Bob Green, group FD at Wilson Connolly, is as a chirpy as a brickie who’s just emptied his hod.
Green was head-hunted earlier this year from Morrison Construction. He’s helped to accelerate the pace of change already under way at Wilson Connolly.
Half-year results (to 30 June) showed the company continuing to make progress.
Operating profit was up 9.5% to £30.1m on turnover of #321m (up 39%), even though margins were squeezed – temporarily says the company – by higher overheads and poor performance in the northwest and Scotland.
The key to Wilson Connolly’s steadily improving results lies only partly in house price inflation. It has also been moving the focus of its activity away from its traditional midlands heartlands into the southeast where house prices are higher.
Besides that, the company is moving into the middle market – the #100,000 to £500,000 range – and away from starter-priced homes. That is why in its last full year its average sale price rose 32% to £124,000.
Green had something of a whirlwind start to the job. When he pitched up for work on 1 March, he was plunged straight into the acquisition of Wainhomes, a £130m builder with special strength in the northwest.
“You always imagine when you join a business that you have a month or so to wander round and have a look. No chance. It hasn’t eased off since then, either,” recalls Green.
Indeed, it hasn’t. In June, Green announced a change in accounting policy.
From the 2001 interims, it has recognised housing sales only on legal completion, rather than on exchange of contracts. Green points out that this aligns profit recognition more closely with cash collection. It also brings Wilson Connolly into line with most main players in the house building industry.
“We have tightened up the control and it means that when we recognise a sale, we have got the money rather than on final accounts where the money would come in two or three weeks later,” says Green.
The change meant that restated figures for 2000 looked slightly less rosy, but analysts generally welcomed the move because it will make it easier for them to compare Wilson Connolly’s results more accurately with its peers.
On the face of it, those results should continue to be healthy. The integration of the Wainhomes business was originally intended to produce administrative savings of around £3.5m, largely through merging regional office networks.
Green now reckons the savings will be as high as £4.5m. There are benefits from extra buying power and more admin savings than expected.
A critical issue which has potential long-term impact on the bottom line for a housebuilder is its land buying policy. As it has moved into the southeast Wilson Connolly has been buying smaller sites. Green believes that it’s now time to reverse that and start buying larger parcels of land again.
“It’s not until you get on to a site that you start to learn about it all. With a small site, by the time you’ve discovered what the issues are it’s too late. We need larger sites that we can build on for two or three years and where we can really make the higher returns,” he says.
The company is aiming for a 20% return on capital employed from its land bank. By the end of last year, return had crept up to 18.3% from 17.8% the previous year. “We believe that 20% is the right sort of target that we should be aiming for,” says Green. “It should give us the right size land bank to give us security as we move forward and enable us to have sufficient land to make sure we make the right sort of margins.”
Wilson Connolly has been making much of its environmental credentials and of its willingness to develop on brownfield sites. Yet it’s probably too soon to dub it the Body Shop of the building industry. But the firm is looking actively at how it can distinguish itself in a market where most players seem to have much the same to offer – four walls and a roof.
The company’s innovative Lifebuilding scheme in Northampton, aimed at creating a distinct community rather than just a housing estate, could offer one way forward. But Green’s reaction seems to suggest it has not been as successful as the company hoped. He talks about putting the concept on the shelf and concentrating on the firm’s core product.
That could be wise. If the economy turns down seriously, that bonus of constantly rising house prices could be reversed. Sitting on work-in-progress that is declining in potential sales price won’t seem so much fun.
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