Smash hit

Even the sector’s most experienced operators, such as Tony Pidgley, chief executive of Berkeley Group, say it is the worst market they have experienced. He said: “This market reminds me of the early 1970s. It’s much worse than the 1990s. The downturn has been much quicker and sharper. In 1973, no sooner had you blinked than you were in a collapse.”

Pidgley is not alone in sharing that bleak view. Paul Checketts, construction analyst at Oriel Securities, a stockbroker, said: “The fallout could be worse than people have been forecasting up to now. The implication is that the numbers are going to be worse than companies think.”

DEVON’s Cavanna Homes has been building houses since 1923 and seen more than its fair share of economic ups and downs. However, this downturn caught its directors, who include 85-year-old chairman Patrick Cavanna, by surprise. Eugene Rapson, Cavanna’s finance director, said: “We initially thought this would be a short-term correction. We thought it might be spring 2009 until we got some improvement, but now we think it won’t stabilise until mid to late 2010.”

Rapson argues that with low gearing of about 20%, Cavanna is well protected, but the company is preparing to batten down the hatches. “We have five sites that we are due to start [building] on in the next two months — but now we are considering starting on only one of those,” he said.

It is a pattern being repeated across the country, with many companies faring far worse than Cavanna. According to figures compiled by Begbies Traynor, the insolvency specialist, 136 housebuilders have been placed in administration this year, which equates to almost six a week.

Many smaller building companies are family-controlled concerns, and part of their problem, said Nick Hood, Begbies Traynor’s senior London partner, is “management denial”, where businesses look at the situation and think they can “muddle through” because they have survived previous downturns. It is an attitude, he said, that is misguided, particularly given the way this crisis has unfurled so fast.

The upshot is that there is going to be a huge shortfall in the number of new homes being built this year. In 2007, there were 190,000 homes built in England, according to the Home Builders Federation (HBF), a trade body. Estimates suggest that the figure for 2008 will be half that number and a long way short of the government’s target of 140,000 new homes erected every year until 2016.

This housebuilding crisis could have a longer-term impact. “If you allow the industry to downsize to suit the current market, it’s going to take an awful lot longer to build that back up again,” said HBF spokesman Steve Turner. Another problem is that the economic crisis is not only affecting housebuilders but having a ripple effect on many associated industries, including estate agents, building-materials suppliers, subcontractors and so on.

In Scotland, the worst of the housing crisis has yet to hit, but businesses are putting plans in place to deal with it when it does. David Sutherland, chairman of Tulloch, a large privately-owned Scottish housebuilder, said he had worked in the industry through the last two downturns, in the early 1970s and early 1990s, and thought that this time round “is as bad as those in parts of the UK”.

He had spent time in the company’s showrooms to get a better view of customer concerns and is, in part, basing Tulloch’s strategy on what he learnt. The company is developing a new mortgage product that will come with an approval lasting nine months to give customers more time to sell their existing properties. Its larger rival Taylor Wimpey is also using big incentives to drum up custom. It is offering homebuyers a quarter of the value of a new home interest-free for 10 years.

“People want to move, but they can’t get a mortgage and they can’t sell their houses,” said Sutherland.

WHEN Barratt’s Clare was in the closing stages of negotiating the Wilson Bowden takeover, he was interrupted by a power cut at his London base and had to jump in a car to dash to the London headquarters of his adviser, UBS. He may now wish there had been a power cut there as well. This is not a deal where anyone has emerged with glory. Even David Wilson, the founder of Wilson Bowden, has shared the pain. In the cash-and-shares deal, he took £190m in cash, but he also took £243m in shares, which are now worth less than 10% of the original value.

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