Housebuilder margins envy of contracting sector

The London housing market may be ailing and Berkeley is expecting future profits to fall but the capital centric housebuilder still has a profit margin 10 times larger than most building contractors.

Berkeley expects profits to drop by 30% from 2019 but in the 12 months to April 2018, the group’s operating margin was 28.2%.

That figure remains the best amongst the leading housebuilders quoted on the stock market, but four out of the top five housebuilders are still working to a 20% margin.

The latest margins at the five biggest contractors quoted on the London stock market range from 2.1% at Balfour Beatty to 4.9% at Galliford Try, whose figures are inflated by a substantial private housebuilding operation.

At Galliford Try, the construction margin is just 0.9% compared to 18.5% at Linden.

Work from other sectors and overseas also inflates the group margin at other big contractors.

In 2017, Balfour Beatty made a profit of £41 million in the United States in 2017 but just £16 million from the UK. At Interserve, the UK construction margin is a negative 1.9% compared to 7% from overseas work.

Financial pressures harder on contractors

Outside of London, the conditions for the housebuilding market remain good but for building contractors the future is harder.

Housebuilders expect input cost rises of 3-4% this year, which has slowed the rate of growth in their margins but main contractors with far smaller profit margins are in a more delicate position.

In its latest tender price forecasts, cost consultants Arcadis wrote: “Tempered tender price growth and high input cost growth has squeezed supplier margins. This has negatively impacted profitability in the supply chain, which was only just recovering from the great recession of 2008.

“Last year, the average margin for the top ten main contractors was -0.5%. Even across the top 100 main 2-3% of contractors, the average margin was around 2%. As a result, the ability for the supply chain to reduce or hold pricing is very constrained.”

Reduced output, but still input rises

In its BCIS All-in Tender Price Index, the Royal Institution for Chartered Surveyors is forecasting a rise of 2.9% for the 2018 calendar year with steady rises up to 4.3% by 2022.

BCIS cited concerns over the impact of Brexit and said: “This will put upward pressure on promulgated wage awards as the unions try to keep pace with higher site rates obtained due to the reduced labour pool. Site rates over and above promulgated rates will be reflected in the market conditions factor, putting upward pressure on tender prices.”

In its June 2018 forecasts, Gardiner & Theobald left its forecast of a 1% rise in tender prices this year unchanged. “As UK economic growth slows, the construction industry appears less resilient with reduced levels of growth,” cautioned G&T.

At the end of Q1 2018, the Mace Cost Consultancy (MCC) predicted a rise of 1.5% in tender prices this year.

MCC managing director Steven Mason said: “A hardening of a market place that has ongoing capacity issues and that is less willing than ever to accept unlimited risk will start to see a small upward shift in tender prices in 2018 as the supply chain is no longer able to continue to absorb the spiralling impact of increasing resource costs.”

As pressure on margins mount, this is a factor behind contractors looking to find a better return on spare cash and moving into development work as we highlighted in last months article here.