FOR A MAN who took over a housebuilder in the middle of a devastating financial and property crisis, David Ritchie, the chief executive of Bovis Homes, looks remarkably relaxed.
But it is certainly fair to say the pain has eased in recent months for the firm, even though Ritchie remains in the middle of turning it around. Bovis stopped building altogether at one stage and its new CEO has slashed its costs by half since he took over in July 2008, in the depths of the housing market collapse and recession. Ritchie, who has worked at the firm for 12 years, took over the baton from Malcolm Harris, who moved up to become chairman when he hit 60.
“We have now resized the business,” says Ritchie, who has a soft-spoken Falkirk accent. “We are on the third phase of recovery for the business, which is to aggressively buy up land. If we are right this is the bottom of the market.”
He says that over the next two years “we want to buy twice as much land as we use. This is a great opportunity to buy a key raw material at the bottom of the cycle.”
Ritchie is speaking in his large modern office at the firm’s headquarters in New Ash Green, Kent. He is short and so lean he could pass for a long distance runner, but the married father-of-two says the most strenuous things he does is cut the grass on his motorised lawn mower and chase after his young sons at the weekends.
The Bovis Homes boss says that land tracks house prices in a ratio of around three to one. If house prices move up one per cent, land will move up three per cent, and vice versa. So since national house prices are on average 20 per cent below their summer 2007 peak, this makes land cheap to buy. Ritchie’s thinking is the more land it snaps up now the greater the chance it will have to build profitably when the market picks up. So far this year Bovis, one of the UK’s smallest listed housebuilders, has added 1,874 new plots, boosting its landbank to 13,113 units. The firm is in negotiations to buy another 3,000 plots.
Bovis is a mid-market builder that typically sells three and four bedroom brick houses on greenfield sites on the edge of towns or villages in the south of England. In the last year, 80 per cent of the land it bought was in the south – in places like Bristol, Reading and Cheltenham.
Ritchie sold a lot of houses in 2009, cut costs, and carried out a £60m share placing last September. This saw him move Bovis into a position of having £112m in the bank with £150m of undrawn bank debt to call on.
Last month, the housebuilder reported a first half profit of £3.5m, an improvement from a loss of £8.6m a year ago. It sold 803 houses, up from 754 in the same period 12 months ago. However, the average price at which the properties were sold fell one per cent to £158,500 from £159,700, mostly due to Bovis selling a higher percentage of its homes as cheaper social housing. The firm also plans to reinstate its dividend at the end of this year after suspending it in the housing crisis almost two years ago.
Ritchie adds that if house prices fell a further five per cent he would still be “comfortable” with the profit the business made. However, he thinks prices will actually remain stable “for quite some time.” He adds: “I see a U-shaped recovery. But the question is how long the bottom of the U will be. I feel now it will be longer than I had thought a year or so ago.”
A recent Savills report thought there would be no sustained recovery in the housing market until 2012, although Ritchie won’t be drawn on when he thinks the market will pick up.
Still, Bovis has a long way to go to get back to the levels it was at before the market collapse in early 2007 when it sold 50 houses a week. Currently it sells 27.
The recession has had a profound effect on mortgage approvals, which ran to 110,000 in August 2007, but plummeted to 23,000 in December 2008. Currently, they are running at between 45,000 and 50,000 a month.
In was during this freefall that Ritchie was handed the top job two years ago.
“By the middle of 2008 it was clear that we were looking at something very serious indeed,” he says.
Ritchie explains: “We began a three-step programme. The first step we had to take was to set about stopping spending money. We simply stopped building. In an ordered way, we completed what we were contracted to finish. Other houses we made weather-proof and then halted.”
The chief executive also took an axe to costs, cutting staff numbers from 1,000 to around 400, and cutting overheads in half to £25m.
In 2008 the firm doubled the percentage of cheaper social housing homes it usually sold to 30 per cent “because something like 90 per cent of our private customers disappeared.” This is because Bovis targets first and second time buyers, who usually need large mortgages. The business made a pre-tax loss of £78m in 2008.
By the start of 2009 Ritchie had cut costs, but he was still left with 1,000 unsold homes and 2,000 partly built houses on his books.
Ritchie says: “The second step was to release the cash we had in the business. We had to sell houses, which we did, not for as much as we would have liked to but those were the market conditions that prevailed.” In that year the business only built 800 houses, but sold 1,800. This year the firm plans to sell 1,900 homes.
This brings us to the third step in Ritchie’s plan, began at the start of 2010, which is to buy up cheap land to take advantage of the recovery when it comes.
But for Ritchie a rise in housing activity is more important than simply a rise in prices. He says: “It is all about getting people to get access to mortgages. That’s what we need to build a bigger business.”
As an example of how tough things are for first time buyers, Ritchie says that in the last quarter of 2006 around 8,000 first-time buyers were able to get mortgages of 90 per cent or more. In the same period in 2009 that figure fell to “less than 100.”
Bovis attempted to kick start the first time buyer market by entering into a deal with the Woolwich in June. The pair launched a 90 per cent mortgage, which will see Bovis pay for the mortgage insurance cover if buyers lose their jobs for up to 12 months. “The idea is that we will share some of the pain. But the result is that only we are promoting 90 per cent mortgages.”
Ritchie had no figures for the take up so far, saying it takes a while for schemes like this to bed in. He adds he expects to see “a number of real prospects coming in over the next few months.” On the current state of the housing market Ritchie says he feels “okay about life. Any business that has cash in the bank today is well placed.”
But investors are sceptical, and Bovis, along with most other housebuilders has seen its market values fall beneath its net asset values for large parts of the year. In Bovis’ case the value of its net assets is currently £692.8m, while its market capitalisation is around £515m.
Ritchie says: “Shareholders buy our Bovis story, but they are not so sure about the housing market, so we are saying to them: ‘When you come back to this sector make us your housebuilder of choice.’ I can understand their nervousness.”
Ritchie says the coalition government “is committed to building more houses”. The October spending review is likely to see central government compel local councils to streamline their applications for planning permission and relax the amount of social housing a housebuilder is forced to allocate to a project.
However, all the indications are that housing activity will trail behind the 2007 peaks for years to come. House prices are falling again, according to Rightmove, which will eventually make homes more affordable but could hit housebuilders.
One thing is clear: Ritchie, and the investors in his sector, are playing a long game. It will be several years before we know whether their bet has paid off.
CV | DAVID RITCHIE
Work: Appointed chief executive in 2008, Ritchie was group managing director from 2007 to 2008 and group finance director from 2002 to 2006. He joined Bovis Homes in 1998 as the group's financial controller. He was previously employed by KPMG and was involved in advising clients on acquisitions, disposals and flotations as well as audits.
Education: Reading University, read economics and accounting
Family: Married, with two children
Lives: Just outside Tunbridge, Kent
Hobbies: Works in his garden at weekends