ref="http://www.cityam.com/company/persimmon">PERSIMMON chief executive Mike Farley is not looking for a magic bullet. The boss of the country’s largest housebuilder is clear that the sector has endured its worst slump since World War Two and faces at least a two-year road to recovery.
The industry tends to listen when Farley speaks. Not just because he runs the UK’s largest housebuilder by market value (currently around £1.1bn), but because three years ago – when his closest rivals were buying at the height of the market – he decided to pass.
Persimmon took a long hard look at Taylor Woodrow but decided not to buy its rival. George Wimpey took the bait and completed a £5bn merger in 2007. But after two years of heavy losses, and racking up £1.5bn of debt, the newly created Taylor Wimpey almost went bust.
An amiable Farley, sitting in his spacious office in the firm’s beautiful two-storey Georgian manor house near York, agrees that he was right to keep his hand in his pocket on that occasion.
He says: “That was the best deal we never did. We could see Taylor Woodrow’s exposure to the US market. We saw the slowdown there, and didn’t think the price was justified.”
Not doing the deal meant Farley did not have to tap his shareholders for more cash during the worst of the housing slump. His largest rivals Taylor Wimpey and Barratt, who bought Wilson Bowden for £2.2bn in cash and stock in 2007, were forced to go cap in hand.
But Persimmon made losses during the two-year downturn, just like the rest of the industry; in 2008, its debt hit £1.14bn. Farley cut back on building, slashed overheads by half (saving £50m a year), and brought staff numbers down by more than half from 5,000 to around 2,400.
“We have come through a difficult period after the financial crisis; our priority now is to rebuild margins and carefully control our cash,” says Farley. “We cannot borrow lots of cheap money as we could a few years ago.”
Farley, 54, adds: “Mortgages coming back to an affordable level is the fundamental issue. People do not have the large deposits of £30,000 to £40,000 they are being asked to provide.
“Banks are not willing to lend mortgages on 90 to 95 per cent loan-to-value ratios anymore. And in the rare cases they are, they are setting interest rates of six per cent.
“The norm now for banks is a 70 to 75 per cent loan-to-value ratio. I don’t see this massively changing throughout 2011. Next year will be a year of stability.”
The company said in a trading statement earlier this month that its debt is expected to be cut to £80m by the end of the year, £20m below its summer guidance.
Farley says: “We have been paying down debt over the last few years. We have not had to go to our shareholders and ask them for cash. This is something you only do as a last resort.”
The company says it expects its housebuilding to rise five per cent, completing 9,400 houses this year, and its margins to double from 2009 to stand at eight per cent.
Earlier in August the business posted a first-half profit of £101.4m, compared to £9.8m a year ago, largely boosted by a £70.7m write-back on the value of the land it holds. Sales rose 27 per cent to £776.6m, and the average selling price for its homes rose 8.6 per cent to £168,936. The firm was also able to pay a 3p dividend, the first payout shareholders had received in two years.
But Farley is not in any danger of getting carried away with these figures. They are rises from a low base.
Farley says that at the height of the 2007 boom, banks were approving 120,000 mortgages a month. This fell to a low of 27,000 a month in November 2008.
Currently banks approve around 50,000 mortgages a month but the long-term average is 92,000 a month. So the industry is about half as big as it has become accustomed to.
Persimmon owns three brands. Its upmarket houses are built under the Charles Church label, which range up to £1m-plus and account for 22 per cent of sales. Persimmon is its family home brand and accounts for 60 per cent of revenues, while Westbury builds social housing and accounts for the remaining sales. The majority of its homes are built on the edges of urban areas around the country.
Farley remembers exactly where he was when he realised his industry had hit its biggest slump in a generation. “It was 10am at the start of week 14 in 2008,” he says. At the time, he was sitting at his desk on Monday morning, reading the weekly sales figures as he always does. But this time it was hard to believe what he was seeing.
“Sales had fallen off a cliff,” he recalls. “They were down 30 to 40 per cent. I had never seen that sort of decline before. Normally sales fluctuate a few percentage points week on week. Also, when you do see a fall, it is centred on a particular region for whatever reason. But this was right across the board. Banks had run out of cash and had simply stopped lending.”
This led Farley to cut back on housebuilding and staff for the last two years. But now he believes the industry has begun its long climb towards better times. He says he can get the firm’s margins back up to pre-crisis levels of between 15 and 17 per cent “in the next three years”.
The housebuilding boss says he will be able to do this by a mixture of continued cost cutting, and the “careful management” of its properties and its landbank, which has enough plots to build on for six years.
Although the business will complete 9,400 homes this year, it will only buy 8,500 plots. “We are being cautious when it comes to land,” says Farley.
However, a rise in margins will be determined in the main by a rise in house prices. And most data shows that house prices, after making gains earlier in the year, are beginning to stall if not decline.
Farley rejects this. He says: “A lot of this data includes wild month-on-month fluctuations that we do not see when we come to actually selling houses. We say prices are stable.”
He does not see the government’s Comprehensive Spending Review in October greatly hitting the housing market.
Earlier in the year, Farley openly worried about the effect that 500,000 fewer public sector jobs – which will be slashed as part of the government’s austerity drive – would have on his industry.
However, the Office of Budget Responsibility last month said public sector job losses are unlikely to top 330,000. And Farley is also pleased with the staggered nature of the cuts.
He says: “They will be phased in over four years. This will give the private sector time to adjust and provide more work. These jobs cuts will not all come at the beginning of the period. This is better news than we had anticipated.”
Persimmon said this summer it will create 600 jobs this year.
But Farley is under no illusion that this modest growth will herald a return to the go-go years of housebuilding any time soon. And consolidation is certainly off the agenda.
He says: “We have good geographical coverage. We can grow to build 14,000 homes a year with the infrastructure we already have. We have no need to consider an acquisition at this time.”
Farley likes to spend three days a week on the road inspecting sites. He says: “It’s good to be at the sharp end. I like to see what’s going on. Our people are working very hard at the present time. But we are beginning to make progress. We are opening new sites and buying new land.”
This leaves the housebuilder with the tough task of rebuilding sales, margins and profits – one brick at a time.
CV | MIKE FARLEY
Work: Joined George Wimpey as a graduate trainee in 1972, spent five years as a construction manager for Wilcon Homes; joined Persimmon in 1983 and was appointed to the board in 1989; then, after a variety of roles, became chief executive in 2006
Education: Lanchester Polytechnic (now Coventry University)
Family: Married, with two children
Lives: Oxfordshire and Brittany
Hobbies: Follows England Rugby and Swindon Town FC and sails his 505 dinghy off the French coast.