Persimmon holds back from buying land as job cuts hit housing market

Published 06th Jul 2010

Housebuilder's cautious approach to new projects reflects fears of double-dip recession and slump in demand for new homes


The ongoing mortgage shortage coupled with the government's public spending cuts have prompted the housebuilder Persimmon to adopt a cautious approach to buying land for new homes. The move adds weight to warnings from City analysts that land buyers are withdrawing from the market over fears about a double-dip recession.

Persimmon, one of Britain's biggest housebuilders, today reported a 26% rise in first-half sales to 4,657 homes, despite seeing a slowdown in the run-up to last month's emergency budget. The usual seasonal slowdown since the start of May was exacerbated by uncertainty surrounding the government's austerity measures.

"There is a risk of the economy weakening if the spending cuts that are being trailed at the moment bite too hard," said the finance director, Mike Killoran. "Construction activity benefits from public spending. And what this [the cuts] means for jobs and employment within the public sector we have yet to see.

"From a housing market perspective increasing unemployment is not a good thing, even if it just affects sentiment ... That's why we are a bit cautious in terms of buying new land and getting on with future investment."

Alastair Stewart, an Investec analyst, said the comments "chime with more forthright statements from our industry meetings, which suggest major land buyers are pulling out of the market for fear of a double dip".

Robin Hardy, at KBC Peel Hunt, said: "The first half of 2010 is likely to prove to have been like the last days of Rome for the new homes market: improving mortgage lending, a benign pricing environment and rising public confidence in housing. We cannot see this continuing through the second half, and see another step down after the comprehensive spending review in late October, when the extent of public-sector cuts is unveiled."

Persimmon hopes that the availability of mortgages will improve over the next six to 12 months, from about 50,000 mortgages approved by lenders every month to 65,000. But a recent Bank of England lending trends survey suggested that the mortgage market remains flat for now.

A collapse in sales and big write-downs on land values forced Persimmon and its rivals to restructure their businesses. The credit crunch saw the housebuilding industry halved in size. Land still remains scarce.

"There are not a lot of good deals on the market. Landowners are also cautious," said Killoran.

However, Persimmon stressed that it had six years of land supply, its debt pile had shrunk to £122m and was set to fall to below £100m by the end of the year, and cancellations remain at low levels, similar to last year, at about 16%. Total sales this year, including completions and forward reservations, are about £1.5bn, up from £1.3bn a year ago. The housebuilder has now replanned the bulk of its land holdings, with 85% of its plots set aside for traditional two and three-storey housing, for which demand is strongest.

Killoran acknowledged that there was an acute shortage of family housing in London and across the country. One problem is that the industry is in a state of limbo before a new planning regime, which gives local authorities a bigger say, is in place.

The new system is "well intentioned but how it's going to work in practice remains to be seen", said Killoran.

Source: ' Guardian '

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