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Housebuilders will only build as many dwellings as they can sell. Higher interest rates and stretched UK consumer budgets mean sales and activity are falling sharply. Yet new homes are needed more than ever.
Social housing is one answer, though output is modest compared to the great postwar expansion of council houses. Plans by Visty to focus on the sector via its partnerships division were received well at results on Monday, sending shares 15 per cent higher.
The move cements chief executive Greg Fitzgerald’s acquisitions of Countryside Properties and Linden homes. These boosted revenues in Vistry’s partnerships business to more than half of total in the first half of this year.
Funding from housing associations and local authorities means less exposure to land. Shareholders can look forward to lower risk and higher returns on capital. Profit margins are slimmer but volumes should be higher.
About 150,000 new affordable homes are needed each year in England, according to the National Housing Federation, almost three times the current supply. Rising private sector rents only add to pressure on local authorities to increase stock.
Vistry aims to free up capital as it merges its private sector division into the partnerships unit. It thinks it can return £1bn to shareholders over the next three years and pay down its debts.
As exposures to the housing market fall, group operating profit margins will drift lower to around 12 per cent from 15 per cent last year. Returns on capital employed are expected to rise to 40 per cent from 28 per cent last year. Greater visibility should result as volatility drops.
Vistry hopes its shares will re-rate as steadier returns become less volatile. The group’s shares trade at 10 times forward earnings. That represents a discount to the FTSE 350 homebuilders at 12 times.
Underemployed conventional housebuilders will compete hard for social housing business — until their own market turns up again. Customers and investors with an eye on the longer term should favour Vistry.
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