The UK’s four largest listed homebuilders have shareholder capital return programmes in place. As such the competition for new land is not intense which bodes well for homebuilders that are focusing on growth. Bovis Homes invested a record amount in new land in 2014 and is seeing its return on capital improve.

From 2008 to 2013 the UK saw under 125,000 new housing starts a year, which compares to around 175,000 from 2004 to 2007. Current home building levels are estimated to be around 100,000 short of demand.

UK homebuilding falls back

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Source: Persimmon investor presentation

The largest UK homebuilders – Persimmon, Barratt Developments, Taylor Wimpey and Berkeley Group – have capital return programmes in place. This means that, despite the market backdrop, they are not prioritising homebuilding expansion.

The competition for new land is therefore not intense with Bovis Homes stating in its May 2015 trading update that:

“The residential land market remains attractive with a good supply of consented land… The average expected return on capital employed on land acquired this year is circa 30%.”

Land is the scarce resource for homebuilders and can be easily bid up in price during strong market conditions. This happened before 2008 and saw many homebuilders subsequently write-down the value of their land banks.      

With the memory of this period fresh in the mind of executives a more cautious approach is being taken. As such homebuilders that are focused on growth are well placed to buy land at attractive prices and generate strong returns.

The UK mid-cap homebuilders (in the FTSE 250) are Bellway, Redrow, Bovis Homes, Galliford Try and Crest Nicholson. Bovis Homes has a market value of £1.5bn and is one of, if not the, fastest growing homebuilder in the UK.

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Bovis Homes’ profile: Homes for the South

Bovis Homes doesn’t have exposure to London but the South of the UK made up 75% of the land bank at the end of 2014. This bodes well for home price momentum given the strong housing demand in the South.

In 2014 the group saw 73% of legal home completions come from cheaper land bought after the downturn. This will increase over time and will help boost the profit margin on new home completions.

Home sweet Bovis Homes

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Source: Bovis Homes investor…

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