Cheryl Marabese

Is your house made of bricks or straw...

3 March 2009
Spare a thought for the UK's largest house builder, Persimmon PLC in these troubled times of low borrowing; increasing unemployment; high debt, lament the fact that it was only in 2007 that the shares had hovered around the 1543p level, today they are just 349p and have been much lower, at 184p.

The company made a pre-tax loss of £780m - Most of Persimmon's losses came from a £652m impairment charge on its land bank.

Trading to 8 January 2009 - Results for the year ended 31 December 2008 were:

They had legally completed 10,202 units at an average selling price of c. £172,000. This represents a turnover of c.£1.76 billion.

They have a strong emphasis on cash control, resulting in a reduction of total borrowings at the year end to c.£599 million (June 2008: £906 million).

However until there is an improvement in the restricted credit conditions they will have to conserve cash - affecting dividends this year.

They also have forward sales of c.£400 million.

Financial Headlines: Results for the half year ended 31 Dec 2008 were

* Stated before exceptional charges and goodwill impairment

** Stated before the IAS 18 adjustment to reduce revenue by £9.8million to fair value the deferred element of shared equity sales receipts (2007: £nil)

*** Cash inflow before financing, dividends and tax repayment

Housing shortage reasons
According to estimates, there are between 220,000 and 230,000 new households being formed annually. Yet, only 165,000 homes were built in 2002.

All in all, a government report calculated that refusals for planning permissions in major housing developments increased from just 15% in 1996-1999 to 25% in 2002, and also pointed out that in the UK, their was a skills shortage (perhaps 70,000 new skilled workers needed). This government has stated that the UK requires an annual rate of 240,000 houses a year to meet demand. However, the current rate was only 125,000 in 2004 and will be much lower in 2008. Even during the housing boom it was not possible to meet demand.

Firstly, the population of the UK (unlike many other western countries) is rising. Rising Demand - Up until 1997, most years only had up to 30,000 asylum applications a year, and sometimes less. With the new labour Government this figure has dramatically increased. For example, net immigration to the UK increased to 237,000 in 2007, according to the Office for National Statistics, though this could be significantly more. The figures mean that the population has grown by AT LEAST 1.8 million because of immigration since Labour came to power in 1997 (and maybe more). At least another 227,000 failed asylum seekers who should have been removed since Labour came to power in 1997 may still be here. The figures suggest the UK population was just under 61 million last year, with people living significantly longer, that figure could rocket further.

Furthermore, the number of households is also rising faster than the population. For example, there is an increase in the number of one person households. This is due to factors such as divorce rates, ageing population and people leaving home earlier.

There is also rising demand for second homes and demand from abroad. The demand from foreigners is particularly noticeable in parts of London. Russian oligarchs take advantage of UK tax law to live in the UK and avoid paying tax. (It is rather perverse that locals are being forced out of their own housing market, so that Russian oligarchs can avoid paying tax. But, this isn’t just an ‘urban legend’ there is a lot of truth in it.

The long term future for the UK housing market remains good, the short term outlook however is challenging - if and when things improve, Persimmon should benefit.

Remember as 2008 has shown, shares and other financial assets can go up and down at frightening speed. Don't buy any, unless you know what you are doing and can afford to lose the money.

Cheryl Marabese