Persimmon Plc (PSN) will become more dependent on an improving U.K. mortgage market to generate profit as the homebuilder’s ability to widen margins fades, incoming Chief Executive Officer Jeff Fairburn said.
“There will be a natural flattening of the curve of profitability,” Fairburn, 46, who takes over as CEO from Mike Farley in April, said yesterday in an interview. “We’ve seen a pretty good increase in the last few years as we’ve moved onto new land. Those margins will tail off.”
U.K. homebuilders have boosted margins by focusing on higher-end homes and building on discounted land after a slump during the financial crisis caused sales to drop. The Bloomberg EMEA Homebuilders Index (BEUHBLD), composed of the U.K.’s seven biggest publicly traded house builders, gained 70 percent last year.
Persimmon expects its underlying operating margin to reach as much as 17 percent within the next 18 months, up from 4 percent in 2009. The underlying operating margin last year grew to 13 percent from 10 percent, the U.K.’s largest homebuilder by market value said yesterday in an annual results statement.
The company’s 2013 margin, excluding exceptional items and goodwill impairments, is likely to widen by less than 3 percentage points, Fairburn said.
Home completions rose to 9,903 from 9,360 a year ago as Persimmon’s net income increased 56 percent to 170.2 million pounds ($258 million). The company, based in York, England, has the capacity to build as many as 14,000 homes a year, Fairburn said after the results came out. Persimmon’s home completions peaked in 2006 at 16,701, according to the company statement.
“We anticipate volume moving forward, continuing to invest in land,” he said. “It’s a sensible, achievable volume from the size of the business that we have now, but we will deliver the volume that the market allows.”
A constrained home-lending market has caused the number of mortgages that have been granted to fall in the past five years. Gross mortgage lending amounted to about 143 billion pounds in 2012, compared with 363 billion pounds in 2007, according to the Council of Mortgage Lenders.
The dearth of mortgage lending has also weighed on competitors such as Bovis (BVS) Homes Group Plc, which reported lower sales volume yesterday.
“A continuing lack of availability during the year of high loan-to-value mortgage products constrained market activity for new-build homes,” the Longfield, England-based homebuilder said in a statement yesterday. The company’s 2012 net income increased 76 percent 40.9 million pounds.
Bovis declined the second most on the Homebuilders Index today, falling 1.6 percent to 649.5 pence at the 4:30 p.m. close of trading in London. Persimmon had the third-biggest drop, declining 1.45 percent to 885.5 pence.
There are signs the mortgage market is undergoing a revival. Data released Jan. 30 showed mortgage approvals rose to an 11-month high in December as the central bank’s Funding for Lending Scheme eased conditions in the home-loan market. The Bank of England is counting on the program to encourage lending and provide a boost to an economy that’s close to slipping back into a recession.
Crest Nicholson Holdings Plc’s 225 million-pound initial public offering last week is likely to spur other U.K. homebuilders to do deals, including acquisitions, as smaller builders struggle to raise capital, Fairburn said.
“We’ve identified and set aside money to buy more land, it’s about 400 million pounds a year,” Fairburn said. ”So, we are well equipped to either do small acquisitions” or continue to buy land, he said.
Persimmon bought Hillreed Homes, a homebuilder focused in southeast England, for 35.7 million pounds in October. There hasn’t been a major merger in the U.K. homebuilding industry since 2007, when Taylor Woodrow Homes Inc. and George Wimpey Ltd. combined to form Taylor Wimpey, then valued at 5 billion pounds, according to data compiled by Bloomberg. The company’s market value is now about half that after the shares fell and it divested assets.
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