Chief Executive's Review
Despite the impact of the downturn, Crest Nicholson remains firmly committed to the core values of good design and sustainability for which it is renowned.
Financial Overview
1
Results for the financial period ended 31st October 2009 reflect ongoing difficult conditions in the housing market. Although the rate of sales price decline experienced by the industry during the preceding year has abated in 2009, a number of challenges remain. The availability of mortgage finance has continued to be constrained, property valuations have remained subdued and consumer confidence remains fragile.
Against this backdrop, the business has performed well. Crest Nicholson (CNHL) earnings before interest, tax, depreciation, amortisation (EBITDA) and exceptional items were £15.4m (2008: £24.7m). Profit from operations before exceptional items was £15.0m (2008: 23.9m). The exceptional item represents £18.7m of the goodwill arising on Crest Nicholson Holdings Limited acquisition of Castle Bidco Limited, which was immediately impaired as it was not supported by expected future cash flows.
Inclusive of the exceptional item, the group recorded a loss after taxation for the year of £50.5m. The Directors do not propose a dividend.
| |
2009 |
2008 |
2007 |
| EBITDA (Pre-Exceptional) |
£15.4m
Note 1 |
£24.7m
Note 2 |
£102.8m |
| Houses sold (Completions) |
1,878 |
2,825 |
3,270 |
| Land Bank (units) |
31,153 |
33,204 |
33,154 |
| Average House Price |
£165k |
£180k |
£198k |
| Number of permanent employees |
490 |
590 |
771 |
Housing
Total housing completions in 2009 were 1,878 units, down 34% (2008: 2,825). Open market completions of 1,365 (2007: 2,005) were down 32%, while completions of affordable units were down 37% to 513 (2007: 820). The average sale price was £165k, down 7.8% on the £180k recorded in 2008. Forward sales for 2010 and later years amounted to £165.7m (2008: £164.2m), which includes circa 37% of 2010 open market housing sales (2008: 24%).
Mixed Use Commercial
Commercial property sales from Crest Nicholson's mixed use schemes were £9.5m, down 78% on the £43.8m achieved in 2008. Revenues in 2008 were underpinned by the sale of the lease on 100,000sq ft of office space at our Bristol Harbourside development; there were no comparable transactions in 2009.
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 2,622 plots in the year, as the business adopted a policy of restricting land buying to conserve cash. There were also modest impacts from re-planning certain sites to adopt a product mix more suited to the current sales environment and offer greater flexibility on timing of production. At the 2009 level of Crest Nicholson turnover, the short-term housing portfolio represents over six years supply. The business also monitors the number of selling outlets, and selective land acquisitions at the right price and on the right terms are planned, to ensure that the business has an appropriate number of sites open for sales at any one time. 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 £200m.
Our Employees
Crest Nicholson's employees have continued to respond in exemplary fashion in what has been another very difficult year across the industry. Very regrettably it has been necessary to engage in further headcount reductions in order to secure the future viability of the business. During this period Crest Nicholson's workforce reduced by 40% including the closure of three of the company's seven operating divisions. Employees were consulted and, where positions have been identified as redundant, every effort has been 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.
The Executive wish to thank wholeheartedly our employees for their work in this extremely difficult period, where their continued support has ensured that Crest Nicholson could be in a position to move forward with confidence as the economy recovers.
Health & Safety
We continue to focus on safety training awareness and now require that all Site Managers successfully complete the Construction Skills Site Manager Safety Training Scheme. In FY 09 we continued to keep our accident rate below the construction industry average, and maintained our target of zero prosecutions and notices. We will continue to work with the Home Builders Federation (HBF) to share information and learn from our peers.
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 very pleased 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 a further 84 homes to Code for Sustainable Homes level 3.
In a year when the business environment challenged our resources, we maintained our commitment to innovation, and are delighted to be part of a new and unique partnership of companies in a TSB funded consortium with Stewart Milne Group, Barratt Developments, H+H UK Ltd, BRE and Oxford Brookes University. The £6.3m innovative AIMC4 project, will research, develop and pioneer the volume production of homes to Code for Sustainable Homes level 4 energy performance, via fabric first solutions.
We were also delighted to achieve two further Building for Life (BfL) Gold Standards and awards from the Commission for Architecture and the Built Environment (CABE). Crest Nicholson has now achieved a total of six developments worthy of this coveted gold standard, and we will continue to ensure that high aspirations encapsulated in the BfL criteria remain part of our core planning and design processes.
Our One Planet Living joint venture with BioRegional Quintain, One Brighton, welcomed its first residents this year, and was the proud winner of the 2009 Sustainable Communities Award by the Royal Town Planning Institute.
It was a further honour to have been named Housebuilding Innovator of the year and Sustainable Housebuilder of the year in the Housebuilding Innovation Awards 2009.
The 2009 Next Generation Benchmark assessed the sectors' overall performance in Sustainability and Governance and we were once more recognised as one of the industry leaders.
Risk and Uncertainties
Sound company financing
The financial restructuring placed the continuing Crest Nicholson group in a much stronger position to deal with current economic conditions and to take advantage of commercially attractive opportunities when they arise. Liabilities to lenders were reduced by £630m and the restructured debt facilities were extended to the end of March 2012. Latest forecasts, which take account of current conditions, project that there will be sufficient headroom within the revised facilities to enable the business to continue trading and that the business will meet its covenants. The group's cash position is strong. In the longer term, the risks facing Crest Nicholson relate to the ability to restore an appropriate capital structure when, or before, existing facilities expire.
Continuing 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 continue to limit the percentage loan-to-values that they are prepared to lend to first-time buyers and maintain downward pressure on valuations.
There is still a strong underlying demand for housing, and the demographic changes in the UK will continue to drive that demand. However, consumers may well adopt a "wait and see" approach in the face of uncertainty arising from a new Government and potential fiscal and/or monetary tightening to address the national debt.
The reduction in land buying that has been a feature of both 2008 and 2009, coupled with delayed operational commencements designed to match production with demand, will mean that 2010 volumes are likely to be lower than 2009.
Sustainability and Innovation Challenges
Despite the impact that the current business downturn is having on the industry generally, Crest Nicholson remains firmly committed to the core values of good design and sustainability for which it is renowned.
It remains the case that reductions in mortgage availability and declining sales values raise challenges to current models of housing provision. The significant gap between the levels of production that the industry is willing and able to provide and the Government's forecast for new household formations, points to a serious and growing housing shortage.
Crest Nicholson is working with the public sector to secure means of restoring viability to parts of its land portfolio, including participating in the Government sponsored "Kickstart" schemes, while retaining a commitment to high quality and sustainable developments, in which local communities can grow and thrive.
Crest Nicholson retains the vision, expertise and land bank to succeed, and invests in innovation and sustainability. However we operate within a rapidly changing, ever growing, and uncertain regulatory framework, and still have to set investment plans against this uncertain future. Innovation in the cost-effective delivery of the low carbon built environment is rapidly becoming stifled by an overwhelming bureaucracy coupled with a lack of clear understanding of, for example, "Zero Carbon", "Allowable Solutions", "Carbon Compliance" and their delivery mechanisms. The company recognises the key sustainability and viability agendas faced by the industry, and will continue to work pro-actively with Government.
Skill base
In the current economic conditions, it remains a challenge to recruit and retain staff with the requisite skills to secure and deliver sustainable developments which generate appropriate returns. The sector still faces a reduction in its capacity to recruit and train sufficient apprentices and graduates in the short term. In addition, with significantly reduced volumes of work, the downturn, continues to affect the supply chain in terms of their viability, skill base and ability to continue investment in research and development. Crest Nicholson is working with our Trade Associations, the Government and the Zero Carbon Hub to develop processes and programmes to restore and grow the UK skillbase, and has committed to employing increasing numbers of graduates and apprentices in 2010. This is crucial to the delivery of the Government's challenging agenda for Zero Carbon Homes by 2016.
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. We report extensively on the implementation of our Climate Change Policy, and our wide ranging sustainability targets and performance.
Outlook
In the short term, the business will continue to face challenges with subdued prices and lower volumes. Over the longer term, the fundamentals of the housing market remain strong, underpinned by a structural imbalance between supply and demand.
The Government has made it clear that there will be no compromise on delivering sustainability targets – as have the opposition parties. This is a welcome clarity of objectives, which must now be reinforced with a parallel clarity of definition and regulation.
Given clarity of the regulatory framework and with minimum excess bureaucracy the industry can – and very much wishes – to deliver low carbon sustainable communities. We maintain a high level of engagement with the public sector, and continue to work pro-actively to assist in shaping the future regulatory framework.
We will continue to work intensively with all our stakeholders to increase site starts and the availability of affordable housing via initiatives such as HomeBuy Direct. Ensuring our customers understand the potential benefits of 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 continue to intensify effort - working particularly with the Zero Carbon Hub.
The steps that have been taken to restructure the operations and the finances of the business, along with our continued commitment to excel in the area of sustainable development, provide a solid platform for future profitability.
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About this report.
1 On 24th March 2009, Castle Bidco Ltd, the immediate parent company of Crest Nicholson PLC, was acquired by Crest Nicholson Holdings Ltd, as part of a financial restructure of the Crest Nicholson business. Crest Nicholson Holdings Ltd became the ultimate parent company of Crest Nicholson PLC (Crest), which in turn owns the trading operations of the group. The consolidated accounts of the group include the results of the Castle Bidco Limited group from the acquisition date of 24th March 2009 to 31st October 2009.
2 For clarity: On 3rd May 2007, Crest Nicholson PLC (Crest) was acquired by Castle Bidco Ltd, a company jointly owned by subsidiaries of HBOS and West Coast Capital. Crest Nicholson Group Ltd (CNGL) became the ultimate parent company of Crest Nicholson PLC.
To facilitate comparisons, EBITDA and Profit from operations comparatives for 2007 relate to a full year of trading, as reported in the consolidated accounts of Crest Nicholson PLC in 2007.
Loss before taxation comparatives for CNGL in 2007 are for the period 3rd May 2007 to 31st October 2007.
After the 2008 financial year end, Crest Nicholson Group Limited changed its name to Castle Topco Limited and statutory accounts for 2008 have been filed as 'Castle Topco Limited (formerly Crest Nicholson Group Limited)'