Housebuilder says house completions could nearly halve to as little as 8,000 at current rates of sale
The UK’s most profitable housebuilder has said that its build volumes could nearly halve this year if trading conditions fail to improve from their current level.
Shares in Persimmon dropped 10% in early trading as the housebuilder published full year results for 2022 in which it said it could complete as few as 8,000-9,000 sales in 2023 unless there was a market improvement. If realised, 8,000 completions would represent a 46% drop on the 14,868 homes completed in 2022.
While group chief executive Dean Finch said it was too early to give a “firm guidance” on the year ahead, he said that current reservation rates would also cut the group’s margins by up to 13 percentage points. The group made a pre-tax profit margin of 19% in 2022, after taking into account a £275m writedown to pay for cladding repairs.
The gloomy prospectus came as Persimmon reported pre tax profit of £731m for 2022, down 24% on 2021 numbers due to the cladding charge, on revenue of £3.82bn, up 6%.
Finch said Persimmon had delivered a “very strong performance” in 2022 despite the challenges of rising build costs and the mini budget-inspired drop off in sales in the last quarter, but that in 2023 “the market remains uncertain”.
He said that while sales rates had improved from the average 0.30 sales per sites per week seen in the last quarter of last year, the 0.52 seen since New Year was still well down on the 0.96 sales rate in the same period last year. In addition, the results statement said Persimmon was having to spend around 3% of the price of a house on incentives for each sale achieved, with 25% of customers making use of its part exchange service – compared to 6% in 2021.
Finch said: “Our marketing campaign has helped improve the Group’s sales rates in the new year from the lows at the end of 2022, but they still remain lower year on year. […] The sales rates seen over the last five months mean completions will be down markedly this year and as a consequence, so will margin and profits. However, it is too early to provide firm guidance.”
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The firm said it was too early to assess a full year sales rate, but “should current rates continue for the rest of the selling year, the Group’s current outlet network would imply 8,000-9,000 legal completions for 2023”, and that lower completions “will have a margin impact”.
Persimmon said this scale of drop off would see a five percentage point margin impact from build cost inflation, which would no longer be covered by sales price inflation as in previous years, and a likely eight percentage point margin hit from “reduced volumes and increased sales incentives and marketing costs”.
The firm added that “Ultimately, any margin impact will of course be a product of the interplay between each of these factors”, and that any improvement in the market “will drive relative margin growth.”
Persimmon said it had already instituted a hiring freeze and had identified £40m of efficiencies from its 2023 operating budget. It added it was reining in land spend, by only targeting “exceptional” deals and expected land spend to be “down” in 2023, though the firm didn’t specify by how much. The comments come on the day the Nationwide reported its first year-on-year drop in house prices since 2020, and despite more optimistic noises from a number of other housebuilders in recent weeks, including Redrow, about a marked improvement in the market since New Year.
In a trading update early in the New Year Persimmon had already said that the drop off in sales at the end of 2022 had left its forward sales position sharply lower at the end of the year, down 36% to £1bn as at December 31, with private sales down even more markedly, by 55%. Given the challenges, and shareholder returns, firm’s cash position reduced by 31% over the year to £862m.
The firm said the market had been toughest around London and the South east, where prices were highest and the lack of any government support for first time buyers, since the closure of the Help to Buy programme, was being felt most keenly. It said: “However, affordability and mortgage product availability still remain the key issues, with particular challenges in the south of England. Our sales rates are proving more resilient in the North and Midlands.
“With the affordability challenges in London and the south east, its [Help to Buy’s] removal is being felt most strongly there.”
Despite all the challenges, the firm said it was preparing for recovery in the market. It said: “it is our intention to continue to invest in land in a targeted and disciplined way, when we judge the timing is right, in order to deliver outlet growth in future years.”
Dean Finch added: “Looking further ahead, the fundamentals underpinning demand for new homes remain strong and we continue to target disciplined growth in the coming years while continuing to enhance our quality and service credentials.”
Charlie Huggins, head of equities at Wealth Club, said the outlook for the year ahead remained “downbeat”.
“Persimmon has earned juicy profit margins on the back of housing market strength over recent years. But this year it is facing significant margin pressures.
“The group’s margins could easily halve this year, depending on how the rest of the year plays out. They are operating in ‘wait and see’ mode, until the outlook for the housing market becomes clearer.”
Persimmon chair Roger Devlin added in his comments to the full year results that he expected the number of homes built in the UK this year to drop to “not be much more than half” the government’s 300,000 homes a year target – which would imply a significant fall from the 236,000 net additions recorded in the most recent government statistics for 2021/22.
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