The signs are all there: housebuilders are clearly bracing themselves for the economic fallout of a likely attack on Iraq, and the expected retreat of the housing market after a period of unsustainable growth. As Leslie Kent, an analyst at JM Finn, says: "Housebuilders want to be best prepared for what are inevitably going to be tougher market conditions."
And these fears are justified. In the early 1990s, housebuilders were among those worst hit by the recession. This January, shares in the sector also performed badly, falling 6.7% against a stock exchange average of 6.4%. John Messenger, vice-president of investment bank Morgan Stanley, says: "The market indicates that there is a risk to the consumer that will have an effect on discretionary spending, such as housing."
One form of insurance against market forces is to establish strong forward order books. Although selling houses well ahead of their completion date might eat away at house prices, it does provide greater guarantees for future turnover and profit. Taylor Woodrow announced a forward order book of £260m for the end of 2002, up 25% on 2001. Similarly, Wilson Connolly announced a record order book of £224m, up 136%. "Housebuilders have got a backlog of orders in hand to carry them through the disruptions of the Iraq war," explains David Taylor, an analyst at Teather & Greenwood.
Housebuilders have also looked to reduce debt, hoping to maintain strong cash flow as housing inflation falls to about 5%. Wimpey reduced its gearing (money borrowed as a percentage of shareholders' funds) to 40% from 49% in 2001, and Westbury announced earlier this month that its gearing was less than 75% – it was above 100% after it bought Prowting last June.
The sector has been able to insure itself in this way because of its galloping performance in 2002. According to estimates made by Teather & Greenwood, Persimmon is just one major acquisition away from becoming a FTSE 100 company. It announced a pre-tax profit before goodwill and integration costs of £268m for 2002, a giant leap of 42% on its 2001 results.
Bovis Homes chief executive Malcolm Harris says it was almost impossible for housebuilders' results not to improve in 2002. "Last year was a good market. You have got to make hay while the sun shines," he says. And Bovis did: its turnover was up 28.3% to £461.3m last year.
High profit margins and improving turnover may seem like good news, but have inevitably given rise to questions over the ownership of housebuilders. The sector is traditionally poorly valued in the City, and the combination of large profits and low share value is rumoured to have whetted the appetites of hungry venture capitalists. Taylor Woodrow's shares are hovering around the 170p mark, despite last month's announcement of an annual turnover of £2.22bn and a 15% increase in pre-tax profit to £233m. This led to talk of possible takeover, which chief executive Iain Napier countered strongly: "From a theoretical point of view I cannot see why this industry is attractive to a venture capitalist. None of the criteria that venture capitalists are looking for in firms, such as a business that throws up a lot of cash, fits the housebuilding sector."
Analysts are inclined to agree. They believe the widespread consolidation of 2000 and 2001 is more likely to re-emerge. "It tends to be people in the industry who are better equipped to value landbanks," says Teather & Greenwood's Taylor. "Persimmon has made an immense success of Beazer – I'd have thought its mindset would be to have another look."
It seems that the unparalleled joy found in this year's results is to be followed by 12 months of predatory stalking and market turbulence. But at least housebuilders have learned the lessons of the early 1990s and this time are using the good times to protect themselves against the bad.
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