Housebuilders’ operating margins have collapsed more dramatically than during the recession of the early nineties, the latest data from financial services firm BDO Stoy Hayward has revealed, writes Tom Bill.
The falls, which are the result of land and goodwill writedowns, produced an average operating loss of -26% across the sector in the first six months of 2008.
Richard Kelly, construction partner at BDO, said: “The market hasn’t deflated, it’s exploded. This is a deeper and more sudden correction than the previous recession.”
He added: “Many housebuilders would probably welcome an operating margin of only –17% as seen by Barratt in 1991.”
The average operating margin at Persimmon, Barratt and Bovis Homes reached a –7% low point in 1991, followed by 1% in 1992 and 7% in 1993.
The overall figures this year were skewed by large operating losses at Taylor Wimpey (–94%) and Redrow (–67%).
Taylor Wimpey’s loss included a writedown of £1.5bn; £690m in land and £816m in goodwill from the George Wimpey and Taylor Woodrow merger.
Meanwhile, Redrow wrote down £259m from its landbank in September, a cut deeper than its rivals’ as it was based on the open market value of the land as opposed to site profitability.
BDO said it expected further land writedowns next year and Merrill Lynch analyst Mark Hake has estimated that up to £13.3bn could be written off the land value of the big seven listed housebuilders, wiping out the previous decade’s combined pre-tax profit of £11.3bn.
Kelly said profit figures were now largely irrelevant. “It’s secondary to cashflow. Profit has to be turned into cash, which has to service financing.”
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