As corporate activity flickers into life again, Doug Morrison says it’s different from pre-crisis takeovers
It used to be that any sign of sustained corporate activity among housebuilders would set off alarm bells in the City. And if it coincided with estate agents’ plans for flotation then shareholders knew for sure that the housing market had peaked – time to bail out and invest in utility companies or government bonds.
Times change. This year the sector has experienced the biggest round of takeovers since the credit crunch just as the volume housebuilders have posted uniformly impressive financial results.
In years gone by housebuilders would take over their rivals as a way of buying land to feed the machine and chase volume growth, which led many to the brink of debt-fuelled bankruptcy. But the latest round of activity has been driven by new participants – debt funds, private equity firms and even an insurer in the form of Legal & General. They are all betting on a continued recovery of the housing market. Not even the recent flotation of estate agency Countrywide has spooked investors.
Nor are they concerned that there has been varying degrees of trauma at the three housebuilders involved to date – Countryside Properties, Cala Homes and Crest Nicholson – which were all embroiled in the ill-fated splurge on property by HBOS/Lloyds Banking Group during the boom years (see panel). On the contrary, Crest’s stock market flotation in particular has very publicly reinforced the positive sentiment towards the sector.
“Once you make the connection between politicians thinking housing matters to growth it’s unavoidably the case as a long-term investor that you need to take a careful look at the sector” Bill Hughes, L&G
Tony Williams, independent analyst and managing director of consultancy Building Value, points out that though Crest’s IPO was “priced to go” at 220p a share in February, it was no flash in the pan. The shares have since risen strongly and so too has the sector (see chart). “It was cause or effect,” says Williams. “Either Crest Nicholson’s flotation helped the sector or the sector helped Crest Nicholson. I’m not sure which one it was but the timing was magnificent.”
This year’s deals have come as various government schemes to improve mortgage availability have boosted demand. Improved turnover and an average 70% rise in profits at the quoted housebuilders have in turn fed through to share prices, which rose by an average 26% in the first quarter of 2013 and by 66% over the past year. The sector has outperformed all other share indices (see chart below) over the same periods and is now worth a total of £15.8bn.
Crest, Countryside and Cala emerge from the ashes of financial meltdown
Crest Nicholson returned to the stock market in February, signalling a bright future for the housebuilder as well as the exit of majority shareholders Varde Investment Partners and Deutsche Bank.
It has been a long haul for Crest, which was taken private in May 2007 by Scottish entrepreneur Tom Hunter and HBOS, now Lloyds Banking Group, before succumbing to the market crash. There followed several years of behind-the-scenes wrangling over debt and equity before Varde, a US distressed investment fund, won control.
Crest raised £224.9m in the flotation, which at 220p per share valued the company at £553m. The shares rose immediately and have remained above 318.5p.
Countryside Properties delisted from the stock market in 2005 in another HBOS/Lloyds-backed deal. By mid-2011, the management was openly discussing its return as “a medium-term objective”.
That journey back will come via a subsidiary of US investment firm Oaktree Capital Management, which in February bought Lloyds’s stake, coveting Countryside’s “high quality south-east and east focused land bank”.
Oaktree’s investment – which remains undisclosed – has been used to reduce debt and strengthen Countryside’s balance sheet. As part of the deal, Lloyds agreed a new, five-year debt facility of £165m.
Cala Homes was another housebuilder taken on by Lloyds in the financial crisis. Years of speculation over Cala’s future ended in March when the bank sold the housebuilder to a joint venture between Legal & General and Patron Capital Partners, the private equity firm, for £210m.
L&G and Patron have each taken a 46.5% stake in Cala with the management acquiring 7%. The deal has been financed with £140m equity and £70m debt. For their investment L&G and Patron get an Edinburgh-based company that is active in southern England as well as Scotland. Its land bank extends to 15,300 plots, with a potential gross development value of £3.1bn.
Head of steam
“There’s a real head of steam up now,” says Williams. “The government is underwriting the mortgage market and it just needs a bit of volume growth now, but we’ll get that this year – 5% to 7% in real terms.”
He adds: “The housebuilders wrote off £5.2bn against their balance sheets and they raised money from their shareholders. You and I could make money in housebuilding if we did that. So, the easy money has been made in terms of profit generation and clearly in terms of share prices. It’s going to be harder won from here on in but it’s still going to be positive. I can’t see any reason why it won’t be.”
Even so, there was genuine surprise in the City at L&G’s takeover of Cala in a joint venture with private equity firm Patron Capital Partners. For both Patron and L&G, the acquisition of Cala represented a first-ever direct purchase of a housebuilder
But Bill Hughes, managing director of L&G Property, says: “Once you make the connection between politicians thinking housing matters to growth, it’s unavoidably the case as a long-term investor that you need to take a careful look at the sector. That’s why we’re more engaged there than we’ve been.”
He adds: “The timing of the transaction is to do with a belief in the housing sector but it’s also a belief in our own ability to make wise investments that we believe in over the long run in a universe of opportunity that’s much wider than hitherto people would have imagined.”
Hughes sees the Cala deal as part of L&G’s overall strategy for residential investment. “We’re willing to be more imaginative, not bound by convention,” he says. There are, he suggests, potential benefits to be drawn from L&G’s long track record of dealing with residential through large mixed-use projects.
He envisages a shared knowledge on everything from “how to work the planning system” to design technology and sustainable development.
“We will benefit from the synergies associated with having a part-ownership of a housebuilder because there are opportunities in our portfolio to deliver residential units, and our experience of being involved in residential is something we can transfer across into our ownership of a housebuilder,” he says. “And also I’d expect that we’d learn something from close association with a housebuilder.”
Whether L&G and Patron remain fully invested in Cala for the long run remains to be seen. Williams is convinced that Cala and Countryside will float on the stock market, as will McCarthy & Stone – another one-time Lloyds inheritance now owned by Goldmans Sachs and TPG.
“I wouldn’t be a Jonah about the flotations,” says Williams. “I think it’s healthy that they are coming back to the public market and there’s clearly an appetite for them.”
However, Williams sounds one final note of caution, pointing out that the Yorkshire housebuilder Britannia Developments entered administration in January. “At this end of the market, life is still pretty tough,” he says. “As with prospective flotations, Britannia will not be alone in going the other way.”