Chief Executive's Review

Carbon dioxide emissions are not in recession - and Crest Nicholson will remain focused on delivering sustainable communities.

Financial Overview

Our results for the financial year ended 31st October 2008 reflect the extremely challenging conditions in the housing market. The level of mortgage funding available reduced by approximately 60%, and numbers of first time buyers entering the market declined proportionately.

Before interest, tax, depreciation, amortisation (EBITDA) and exceptional items Crest Nicholson Group Ltd (CNGL¹) earnings were £24.7m (2007 PLC £102.8m).

Profit from operations before exceptional items was £23.9m (2007: PLC £102.1m)

In view of the difficult market conditions experienced in 2008, a number of exceptional charges were booked in the year. These charges were primarily non-cash adjustments to the carrying value of assets held on the Group balance sheet. In common with our peer group, Crest made provisions to reduce the carrying value of land and work-in-progress to take account of the impact of declining house prices. In addition, intangible assets held on the Group balance sheet since the acquisition of Crest Nicholson PLC in 2007 were written down to their recoverable amount. After allowing for these, CNGL recorded a loss before taxation for the year of £526.0m (2007 £10.1m).

	2008	2007	2006
EBITDA (Pre-Exceptional)	24.7	102.8	100
Houses sold (Completions)	2,825	3,270	2,946
Land Bank (units)	33,204	33,154	29,248
Average House Price	£179,880	£197,700	£198,700
Number of permanent employees	590	771	790

Housing

Total housing completions in 2008 were 2,825 units, down 14% (2007:3,270) Open market completions of 2,005 (2007: 2,225) were down 10%, whilst completions of affordable units were down 22% to 820 (2007: 1,045). The average sale price was £179k, down 9.5% on the £198k recorded in 2007.

Forward sales for 2009 and later years amounted to £164.2m (2007: £379.8m), which includes circa 24% of 2009 open market housing sales (2007: 42%).

Mixed Use Commercial

Commercial property sales from our mixed-use schemes were £43.8m, up 72% on the £25.4m achieved in 2007. However, conditions in the commercial property market remain subdued, with both sales and lettings proving increasingly difficult to achieve against the backdrop of a slowing economy.

Land Bank

The short term housing land bank declined by 1,577 plots in the year, as we restricted land buying to conserve cash and to allow time for falling house prices to feed through to land values. At the 2008 level of turnover, the short term housing portfolio continues to represent over five years supply. Our strategic land bank has continued to grow, offering a source of longer-term development value as sites are converted to short-term portfolio at the prevailing market price. The Group's short-term commercial development portfolio retains a value in excess of £205m.

Our Employees

We cannot commend the efforts of our employees enough in this extraordinarily difficult period, and we thank all of them. This was a year of appalling business conditions, in which we very sadly had to lose significant numbers of people. These are people we valued. We consulted diligently during these processes and, where positions were identified as redundant, every effort was made to re-deploy individuals in suitable alternative roles. Where this was not possible, Crest Nicholson has offered active support to those seeking alternative employment.

Health & Safety

We are very saddened to report the fatal injury to a roofing contractor in 2008 at one of our developments in Sussex, and we once more extend our deepest sympathy to his family. While the coroner's inquest returned a verdict of accidental death, and no prosecution was pursued by the Health and Safety Executive, we remain determined to continue to grow the safety culture within both Crest Nicholson, and our supply chain, to ensure that no further fatalities should occur on our sites.

Highlights

Our continued investment in expertise in sustainability remains a key factor in securing land, and delivering new homes and mixed-use communities. I am delighted to report that, despite the adverse market conditions and reduced output, over 50% of our completed homes achieved certification to Eco-Homes, and we delivered our first 20 homes to Code for Sustainable Homes level 3 - three years ahead of the Government timetable.

Having secured planning consent and begun construction of One Brighton, we have continued to work with our partners BioRegional Quintain and this year submitted a planning application for our second One Planet Living® community, and the Mayor's first zero-carbon development – One Gallions in the heart of London's Docklands.

In 2007 we committed to build the winning design of the Mail on Sunday Lifestyle Homes competition, which we will deliver next year to Level 4 of the Code for Sustainable Homes – achieving this a full four years in advance of the Government timetable.

We have embraced the challenge of ensuring we live up to the values worthy of the Queen's Award for Enterprise in Sustainable Development, and are very pleased to have been named Sustainable Housebuilder of the Year 2008 by Building Magazine.

We demonstrated publicly our commitment to address the issues relating to climate change by launching a suite of policies underpinned by stretching targets. We were recognised as one of the clear leaders in the Next Generation Benchmark which assessed the sectors' response to the challenges and risks associated with climate change.

Risk and Uncertainties

Sound company financing

Crest Nicholson is entering 2009 with a lower forward sales percentage than it entered 2008; 283 open market units for 2009 completion, compared with 1,028 in the prior year, and volume levels for 2009 are thus likely to be lower than in 2008.

Crest Nicholson PLC was acquired in 2007 on the basis of its recognised high quality product and reputation in a sector which was seen as having significant potential for rapid growth. As a quoted PLC, Crest Nicholson operated with circa. £350m shareholder funds and £150m of debt. The Private Equity acquisition at £1.1bn burdened the new company with a (cash paid interest) £730m debt to service – which was unsustainable in a sharp downturn.

The financing of CNGL has since been restructured to reduce the interest burden on the business and to provide sufficient working capital to drive the business forward and ride out the worst effects of the economic downturn. Latest forecasts, which take account of current market conditions, project that, outwith a significant further deterioration in the housing market, the current financing of the company is sound.

Tough market conditions

In the short term there is the risk that existing difficulties in the UK housing market will be compounded by a rise in unemployment and/or pessimism about employment prospects. In addition, lenders will undoubtedly require higher deposits from first-time buyers as they seek to de-risk and ration their overall mortgage lending. As a result rates of price decline for new build housing could accelerate as consumer confidence declines, developers compete to clear built stock, and down valuations become increasingly commonplace.

There is still a strong underlying demand for housing, and the demographic changes in the UK will continue to drive that demand. The reduction in land values in a range of 30-50% however renders the Government's housing delivery targets very difficult to achieve, particularly on the larger, more capital-intensive regeneration schemes.

During recent years, on the back of sustained growth in house prices, the public sector has placed significant cost burdens upon the house building process. Given markedly reduced house prices however, the ability for house builders to support these costs is much reduced. Together with our Trade Associations, the sector has identified over 30 areas of recent and emerging policy and regulation, the cumulative cost impact of which, if it remains unchecked, will render development on all but the most prime areas of Britain undeliverable without substantial additional public subsidy. Crest Nicholson will continue to play its full part in seeking to address these challenges with central government and local authorities alike.

Despite the challenges Crest Nicholson remains committed to designing and delivering high quality and sustainable developments.

Skill base

In the short term the sector faces a reduction in its capacity to recruit and train sufficient apprentices and graduates. In addition the downturn, with significantly reduced volumes of work, is affecting the supply chain in terms of their skill base, viability and ability to continue to invest in research and development.

Environmental risks and climate change

Crest Nicholson ensures that it takes steps to remain informed about, and assess the potential business risks from climate change (both mitigation and adaptation), and that environmental risks are appropriately assessed and managed in the land acquisition and planning processes.

Outlook

In the short term, the business will continue to face challenges with declining prices and reduced volumes. Over the longer term, the fundamentals of the housing market remain strong, underpinned by a structural imbalance between supply and demand.

We have maintained our skill base in sustainability, and will continue with a high level of engagement with the public sector. In these turbulent times Crest Nicholson will work with all our stakeholders to bring about the delivery, wherever practical, of the Government's housing targets and the important sustainability and climate change agenda. However we believe that in the short to medium term Government will have to prioritise these targets and/or act to help the industry deliver much needed new homes.

We will ensure that our customers continue to value Crest Nicholson for the combination of quality of our homes and communities, and our transparent sales approach. Affordability remains a key issue, and we will ensure buyers have easy access to the various Government assisted purchase routes such as the First Time Buyers Initiative. We will continue to work with Government Agencies, and lenders to increase the number of shared equity schemes, and will continue to complement these schemes with our own EasyBuy product to further assist the first time buyer.

Ensuring our customers understand the sustainability agenda and the way in which they can maximise the sustainability features of their new homes is a continuing challenge, and an area in which we will intensify effort.

The steps that have been taken to restructure the operations and the finances of the business, along with our continued sound company values and commitment to excel in the area of sustainable development, will provide a solid platform for future profitability.

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