Vistry’s retreat to 12,000 homes: will the plan hold?

Vistry’s new chief executive, Adam Daniels, yesterday laid out a strategy to return the firm, at significant cost and through a substantial restructuring programme, to annual output of 12,000 homes – broadly the scale at which it was operating four years ago. This raises a central question: what has changed during that period, and what does the reversal indicate about the previous strategy?

Vistry’s results for the year to December 31, 2022, the last before its £1.2bn takeover of partnerships housebuilder Countryside, saw it report completions of 11,951, exactly the level it is now targeting. It also that year made £418m in adjusted pre-tax profit and 25% return on the capital invested (ROCE) – a healthy business.

But following that, under the stewardship of former executive chairman Greg Fitzgerald, the firm embarked on a dash for growth, with a stated ambition to build 25,000 homes a year. Fitzgerald even talked of building 30,000-40,000 a year  – way beyond anything managed in the UK before – aiming to break the mould of the UK housebuilding industry.

Four years later, the expansion strategy had coincided with average daily net debt rising to about £800m, weaker returns and a substantial reduction in Vistry’s market value. The company’s statement offered its own diagnosis: “The pace of change meant that the operating model, controls and culture did not scale consistently with the group’s volumes.”

Inevitably, there will be disappointment and frustration that the Vistry experiment has ended in a record £661m half year loss, with its market value today being less than a quarter of the level it was five years ago. However, the immediate question is: does Daniels’ new strategy add up to a workable solution and will it be enough to set the business on a sustainable path back to profitability?

Shrink the business

The change outlined by the new chief executive yesterday – for all the complexity in the detail – is admirably simple. It is this: to keep the purpose of the business the same – mixed-tenure, partnerships housebuilding – but to do it at a much more modest scale. And, in shrinking the business from the current size of around 15,700 completions per year (2025) to 12,000, use the receipts from the sales of land and other assets to help pay down the debt.

The idea is that at a smaller scale, the business will be much more able to be selective about the quality of the land it buys, and better control the product and profits it creates. In doing this it has set out a range of new targets to hit by 2031: delivering a mix of 60% “partner” housing – affordable or private rented – versus 40% private sale; making a 12% operating profit margin; delivering 30% ROCE; and, crucially, getting debt down to a “sustainable” level of £300m.

To achieve this, Daniels has outlined not only shrinking volumes to 12,000 homes a year, but cutting regions from the current 25 to just 12, almost entirely exiting the private sale market in the South-east, and cutting its standard house types back from about 100 to around 35. It will also hold production of its timber frame modular factory at 6,000 units, whereas a couple of years back it talked of building 16,000 homes a year in the factory

A big part of the diagnosis has been that a large proportion of Vistry’s sites – around 40% – have not been producing returns at the level it expects. Now, it hopes to retain and focus on the sites where higher returns can be made, in alignment with its mixed-tenure model.

A man with a plan

The market has responded relatively well. Given that the change of strategy came alongside a profit warning and some weak trading figures for the first half of the year, the fact the business ended the day just 3.1% down on last night’s close can be seen as a kind of endorsement by the City.

Investment bank Peel Hunt said Daniels was “resetting the business at a more sensible, lower level”, while Investec described Daniels as “a man with a plan”, reassured by his confirmation he will not be turning to shareholders to raise cash.

A coherent strategy does not in itself resolve Vistry’s position. The company must now execute a substantial restructuring while contending with weak trading conditions, high debt and uncertainty over asset-sale proceeds.

Delivery issue

Delivering the strategy will be a massive task. “Herculean” is how Alastair Stewart, analyst at Progressive Equity Research described it, while Investec stated: “The key issue [is] now one of confidence in execution and delivery.”

The restructuring will encounter the resistance and organisational inertia commonly associated with major change at a large business. Daniels must also lead it during his first year as a listed company chief executive, having been promoted internally earlier this year.

In addition, he will need to motivate staff to deliver improved business performance at the same time as the business goes through what is likely to be a deep and painful restructuring, with a redundancy consultation launched yesterday morning. Vistry has not yet confirmed how many of its 4,500 staff will be affected by the restructuring, but the cut to expected housebuilding volume is in the region of 20%.

It is also clear this change programme is being launched into a very tough market indeed. Vistry’s trading results for the half year saw it drop to an £83m pre-tax loss even before the major writedowns associated with the strategy change were factored in (its statutory loss for the six months to 30 June was £661m on turnover of £1.42bn). According to Investec, yesterday’s announcement lowered profit expectations for the full years for 2026 and 2027 by 8%-10%, even below the already reduced expectations set from profit warnings in the spring.

Vistry said yesterday its private sales had now slowed over the summer to a rate of 0.3 reservations per outlet per week – and this is despite the company having flagged it was engaged in heavy discounting to get stock out of the door. It is clearly hoping this rate will improve given its new strategy will refocus its private sales business to currently stronger markets in the Midlands and the North.

Land sales

Another risk, according to analysts and market insiders, is the extent to which it can pay off the debt pile by selling assets as it downsizes. According to yesterday’s investor presentation, £350m of the reduction in Vistry’s debt between now and 2029 will come from “reshap[ing the] land bank (including South-east)” – with a further £125m coming from reducing work in progress as units are completed and sold.

The difficulty is that it is aiming to do this at a uniquely weak point in the housing market, making it harder to reduce work in progress. More significantly, with housebuilders currently cutting volumes, many builders have paused land buying, for all but the very best well-located or bargain sites, suggesting it may not be easy to find buyers. Research from Savills suggests development land values have seen mid-single digit falls this year. In addition, with Vistry keen to offload a large number of sites, the firm may not find itself in a strong position to enforce the best deal even where it can find interested buyers.

The plan provides a necessary response to Vistry’s current financial and market position but its success will depend on execution across the restructuring, land disposals and the remaining mixed-tenure business. It is walking quite a narrow path. The company’s partners and the wider industry will therefore be watching to see whether it can stay on track.