Good morning. Good morning, everyone, and welcome to our full year results. I plan to take you through a short introduction. Keith will then present some detail and some numbers, then I will close with an update on operational matters. Firstly, to pick out a few highlights. Record volumes at 10,892 units, an increase of almost 6%. Operating profit up by 3% to GBP 675 million. Our margin also remains strong at 21%. Our dividend increased by 5% to GBP 1.504. We also had a strong net cash position of GBP 200 million at year-end. I'm also pleased to report that we maintained our five-star rating as a house builder for the third consecutive year. Turning now to market conditions. Demand remains robust at our price point. By that I mean at the affordable end of the market.
Our most popular homes tend to be two, three and smaller four-bedroom properties, with the London market most active in the Greater London boroughs, such as Bromley, Bexley and Havering. Notably, our reservations are up year-over-year, and that's a product of having more outlets driven from our land buying program. Now, I can't talk about the market without talking about Brexit. The whole Brexit debate hasn't had a material impact upon volumes. Yes, the uncertainty has made us work harder for sales, and yes, it has led to higher incentives as savvy customers demand better deals. What Brexit is doing is just dampening our growth prospects a little. The rate per sale, per outlet is just a little slower on some sites, and that has an impact on how much we can deliver or grow each year.
That said, there are a couple of things to note. Firstly, the residential market remains heavily focused on the new build sector, principally driven by competitive mortgage finance, particularly the Help to Buy offer, but also stamp duty benefits at the lower end of the price scale. However, stamp duty can be a real issue in London and the Southeast, where transactions can often attract charges of over 10%. Whilst we're not exposed to that end of the market, it does create a jam or a barrier to people moving home. What we need is a stamp duty system that's less complicated, that's less expensive, and one that encourages a healthy housing market. Secondly, Help to Buy changes planned for April 2021 are influencing the way we operate, the way we approach developments and the way we invest.
There are different schemes in Scotland, England and Wales. We're very mindful of the rules. Whilst the schemes are used more modestly in Scotland and Wales, probably around 15% or so, it's still a very strong selling tool in England. To comply with the new regional price caps in England, we scrutinize each land acquisition for product mix and selling values to best ensure that each of our divisions has a good percentage of homes that falls within the caps and are suitable or attractive to first time buyers. As a consequence, our land buying criteria has changed a little over the past six months to accommodate this profile. Something I will talk a little later on this morning. Just to touch on our strategic priorities.
One of the key challenges facing the industry today is the absence of house price inflation, which has historically helped to increase returns. This, coupled with continuing cost inflation, puts inevitable pressure upon margins. These issues, together with the underlying demand for new homes, influences our strategic priorities. The key themes to our strategy are simple: deliver growth, drive down costs, appoint the right people, and strengthen the brand. Our long-term strategy, coupled with a focus on margin and dividend growth, is still the best way that we can add value for our shareholders. I'll hand over to Keith, who is better placed than me to discuss these issues. Keith?
Okay, thanks, Jason. Good morning, everybody. I plan to take you through the results, balance sheet and cash flows in the usual manner. I'll start off with the results, and you'll see that the 5.7% increase in volume, together with a 2.5% increase in the average selling price, which rose to just under GBP 292,000, resulted in housing revenue rising by over 8% to GBP 3.2 billion. Since the low in 2009, housing revenue has risen by a factor of 4.7 times. Other revenue rose to GBP 33 million, with the increase simply due to the timing of the usual commercial sales and other minor items. In addition, in H1, we disposed of a portfolio of freehold reversionary interests on apartment schemes for consideration of GBP 14 million. Going forward, the sale of ground rent portfolios will not be a recurring source of other income.
Overall, gross profit rose by GBP 33 million to GBP 790 million, with the prior year figure restated to exclude losses arising on Part Exchange properties as required by IFRS 15. Operating profit rose by 3.4% to GBP 675 million, and the operating margin was 21%. PBT rose by the same percentage to GBP 663 million, with earnings per share also rising by 3.4% to GBP 4.378. As indicated in March, the growth in volume was driven in part by additional social housing completions following a modest reduction in FY18. We also completed the sale of an additional 179 private homes, which is a solid performance and follows the growth of 9.2% achieved in the previous year. In addition to completions on fully owned sites, our share of output from joint ventures was 41 units, and I expect that this will increase further in the summer of 2020.
The overall average selling price rose by almost 3% to GBP 292,000. The average selling price for private homes rose by a similar percentage to GBP 334,000. The modest improvement was due to the location of sites rather than being due to any underlying house price inflation. The rise in the social average selling price, which increased to GBP 149,000, was more pronounced at 15%. This follows growth in social completions, which was driven by southern divisions such as Essex and North London, whose operations are in higher value areas. Help to Buy continues to be important. It was used in 36% of completions. The bar chart shows price bands and demonstrates that our exposure to the slower upper end of the market is limited, with only 4% of homes above the current Help to Buy threshold of GBP 600,000.
I expect this to moderate downwards in the year ahead, but notwithstanding that, I still expect the overall average selling price in FY 2020 to be in excess of GBP 285,000. London still performs well for Bellway, representing 9% of completions. If you take out apartments from our scheme at Nine Elms, the average selling price in London was GBP 413,000, and we continue to find that demand is robust at this affordable price point. If we look in more detail at Nine Elms, we completed the sale of 214 apartments at an average selling price of GBP 820,000, which means that this one site alone represented almost 6% of housing revenue, a meaningful and non-recurring contribution to the business.
Going forward, our strong investment in outlets elsewhere in the group means that even though this site is now largely traded out, we still expect to be able to grow housing revenue in the current financial year, albeit the margin and selling price benefit of Nine Elms will not be repeated. Our Ashberry brand continues to be used successfully, accounting for 564 homes or just over 5% of completions. This provides a valuable resource in order to increase sales rates and enhance return on capital on some of our larger sites. There remains a balanced split between homes sold in the north and the south of the country, and we don't have too much exposure in any one particular region, with a widespread geographical presence providing a solid platform from which to deliver future growth.
After making further investment in the overhead to deliver this growth, we were able to report a strong operating margin of 21% and an operating profit of GBP 675 million, representing a year-on-year increase of 3.4%. In terms of the increased profit, volume remains the main driver, adding a total of GBP 43 million in the year, with this driven by higher output in our 8 active newer divisions, which we've opened since August 2013. The ongoing margin normalization had a moderating effect on the reported profit, and this was mainly due to a continuing upward trend in terms of build costs, albeit the rate of increase is broadly consistent with the prior year, and reducing house price inflation, which is close to flat on most sites. Looking forward, there will be further normalization in the margin in the year ahead.
Nine Elms added around 80 basis points compared to the prior year. As I've already said, this will not be repeated. Instead, London is expected to generate returns which are comparable to elsewhere in the group. In addition, the land bank margin is being compressed slightly as a result of industry-wide build cost increases, which are no longer being offset by house price inflation. Also, there will be further, more modest dilution as ground rent sales come to an end and the overhead base nudges up slightly. Overall, the moderating effect will be more pronounced than that experienced during FY 2019. It's too early to give firm guidance, and as I'm sure you'll appreciate, a range of outcomes are clearly possible. However, as we sit today, I expect that we'll end the year with a margin percentage somewhere in or around the mid-19s.
We're working exceptionally hard to mitigate cost increases, and Jason will touch on this soon. I've included the balance sheet for reference, and the investment in joint ventures includes our sites at Fradley and Ponton Road. Moving on to more material items, and the total amount invested in land is GBP 2 billion, with some GBP 1.6 billion of this relating to the 26,000 plots which have the benefit of an implementable detailed planning permission. The additions to the top tier of the land bank have a plot cost of just under GBP 60,000, and an average selling price of around GBP 280,000. The overall average plot cost of this section of the land bank is just under GBP 62,000, and the average selling price is approaching GBP 290,000. Our exposure to particularly high-value units is low and is reducing.
Only 3% of plots with DPP had an average selling price above the current Help to Buy threshold of GBP 600,000. Our pipeline of owned and controlled land, where DPP is expected within the next three years, has risen to 16,300 plots. Taken together with the DPP land, this provides a land bank length of 3.9 years, with good balance between providing a visible throughput of land without compromising return on capital employed. In addition, our strategic land holdings have risen to 8,800 plots, and I stress this includes only those that are allocated in local plans or are the subject of current planning applications. To provide some additional detail this year, I'd estimate that we have the potential to deliver a further 16,800 plots on our longer term strategic land interests, i.e., those with a higher planning risk. This gives a total interest in strategic land of around 26,000 plots.
In total, the owned and controlled land bank, together with our investment in strategic land, provides Bellway with access to some 70,000 plots, a solid platform from which to continue our growth strategy. The investment in construction-based WIP has been a major driver for growth and has risen to almost GBP 1.3 billion. Whilst customer demand is still strong, the absence of house price inflation means that many customers feel less urgency to reserve a new home. Consequently, WIP turn is just a little slower, and in addition, sales tools such as further investment in show homes are important to showcase our product and therefore give customers the confidence that they need to buy. The amount invested in Part Exchange properties is closely monitored and remains similar to last year at just under GBP 50 million. The group is financed by retained earnings, bank debt, and land creditors.
We're significantly cash generative, producing GBP 662 million from operations before paying down land creditors and making further investment into land and construction-based WIP. After paying down land creditors by GBP 68 million and investing in site-based construction to achieve growth, the cash generated from operations was GBP 419 million. Overall, after paying the dividend, tax, interest, and other minor items, we ended the year with net cash of GBP 201 million. Inclusive of land creditors, which have reduced to just GBP 298 million, adjusted gearing was only 3%. Average net bank debt during the year was around GBP 165 million. In the year ahead, I expect we'll average a modest net debt position throughout the year.
Our plans for further land investment, together with a 50% rise in the cash tax bill due to a change in government legislation, mean that we expect the cash balance in July 2020 to be a little lower, perhaps GBP 30 million or so less. Just for clarity, that increase in tax payments does not change the effective rate of tax in the income statement. Again, as I'm sure you'll appreciate, the forecast year-end cash balance does, of course, move easily, so we'll give you further guidance in respect of that as the year progresses. The final dividend, if approved, will rise by 5.3% to GBP 1.00 per share, this will bring the total dividend to GBP 1.504, an overall rise of 5.2%, which represents a dividend cover of 2.9 times earnings.
The compounding effect of reinvesting earnings to achieve growth means that the dividend per share is now actually higher than the earnings per share, which we achieved in the July 2007 pre-recession peak. Going forward, our operational capacity and the ongoing demand for new homes still provides further potential for future growth. This, combined with the short-term uncertainty of Brexit and the longer-term objective to retain a flexible capital structure in order to maximize value for shareholders, means that it's not right to commit to a long-term dividend promise. That said, notwithstanding the ongoing margin normalization and the effect that this will have on earnings in FY 2020, our lowly geared de-risked balance sheet and our confidence in the medium-term growth prospects of the group mean that I still expect there will be a further increase in the ordinary dividend in the year ahead.
Our approach to growth requires an ongoing focus on return on capital employed, and this has remained high at 24.7%, but slightly lower than last year, principally because of the margin dilution and slightly slower WIP turn. Post-tax return on equity was also high in 19.8%, with this achieved from a low-risk balance sheet. Beyond FY 2020, we retain the ability to deliver further earnings growth. We've got a strong culture of cost control, which is supported by a number of medium-term initiatives. We can also invest in land and have a proven track record of successfully opening new divisions and outlets, with this resulting in outperformance of sales rates in FY 2019. Whilst margin normalization and Brexit uncertainty may dampen FY 2020 prospects somewhat, I see no reason why the group cannot continue its trajectory of earnings growth in FY 2021 and beyond.
In addition, we're highly cash generative, and that provides for further scope to continue increasing the ordinary dividend. Jason.
Thank you, Keith. Starting with growth, the majority of our increased volume comes from our newer divisions. Scotland East delivered 273 completions in the year in FY 2019, with our newest divisions, Eastern Counties and London Partnerships, both able to contribute in the year ahead. Our Partnerships Division has made a promising start. We have over 1,000 plots already contracted and a further 600 plots agreed with heads of terms. Should market conditions permit, we also have plans to open a new office in the northwest of England, probably towards the end of the next calendar year. This generates a capacity of just over 13,000 homes, and we have a longer-term ability to expand beyond this. That said, it's all very well having the infrastructure in place, but we need the right land in which to feed the divisions. In the year, we contracted on 13,100 plots.
While sufficient for today's volumes, to continue with our growth, we need to just gently increase that number as we progress in the years ahead. Our strategy of driving the number of selling outlets through our land buying program is clearly paying dividends as both outlets and sales volumes increase year on year. As mentioned in my introduction, we are applying a strict focus to both product mix and selling values to ensure our divisions are best positioned to accommodate the Help to Buy rules planned for April 2021. To complement this approach, we're also invested in some larger sites. For example, we recently acquired a site in Churchdown, near Gloucester, for 465 units. We also have a further three sites agreed, which combined total a further 1,500 units.
The group is big enough to buy a handful of these sites each year to provide that certainty of supply without probably necessarily changing the risk profile of the business. Our strategic land department also continues to make good progress. In the year, we contracted on 29 options and converted 1,700 plots to our owned and controlled land bank. Turning now to cost initiatives. As Keith has mentioned, the primary focus of the business today is control of costs. In FY 2019, we experienced cost inflation of around 3%. To mitigate the impact of these costs, we have a number of initiatives that our new group commercial director is driving through the business. First and foremost is our Artisan standard house type range, which has made considerable progress since we launched it over a year ago.
To give you an idea of the success and speed at which it has been adopted, we now have some 12,000 plots in various stages of the planning system across the group. We expect to complete 500 Artisan homes in FY 2020 and close to 3,000 in FY 2021. We're already starting to see the benefits: faster planning applications, reduced design fees, and lower marketing costs. Going forward, we expect to see reduced build periods, reduced maintenance costs. With the adoption of our optimized roof pitches, our drainage systems, and our heating designs, inevitably, there will be further procurement savings in the years ahead. Notably, all of these benefits can be delivered without compromise to our build quality. Similarly with procurement savings, the economies of scale are obvious to our buying power.
Whilst the majority of our supply costs are fixed for the current financial year, we are seeing signs of better deals. Blocks have only increased by 3% in the current year, whereas that was 6% in FY18. Many timber products are now starting to hold prices firm for longer periods. The same applies to the labor market. Bellway 2020, something Keith mentioned, is another internal cost-saving initiative, and this is very much a culture or a message to our staff to be more frugal and more efficient, individually within their workplace. Keith has set every division across the group a cost-saving target. It could be something as simple as energy saving in the office or something more significant, like reviewing engineering levels at pre-planning stage on a development. Finally, our COINS valuation system.
This has now been adopted or installed in 50% of our divisions, and this will give us better visibility and the opportunity to better benchmark costs across the group. Now for a few bits on HR, appointing the right people. We have always had a strong culture of developing people through our business, particularly with senior managers and directors, and that's what gives us that strength in depth to our management teams. Our HR team have done an excellent job in developing our new Bellway Careers website, providing opportunities for young people in house building. Our new Bellway Academy offers a more structured approach for apprentices, graduates, young people, but also provides specific training for site managers. In 2020, we plan to appoint 40 new graduates, 50 new apprentices, and we're also planning to recruit over 50 young women into our construction departments across the U.K.
It's proving to be very popular. For our graduate program alone, we've had over 1,000 applications for just 40 positions. If your sons or daughters don't want to become overpaid analysts, they want more, I don't know why I'm looking at you, Chris, they want more excitement in their life, tell them to log on to our new careers website, they can come and work for Bellway. Just to finish off on ops, strengthening the brand. The key thing for me on brand is delivering a higher customer service level. Whilst I'm really pleased with our new website, our new social media hub, it's customer service that has got my attention. I'm very conscious of that negative house builder image in the wider market, I want Bellway to stand above that.
We are a five-star rated house builder, and we seem to do the hard work well, with 92.2% of our customers saying that they would recommend us. If you ask those same customers, "What do you think some nine months later?" That figure drops to 79%. My focus is post-move-in. How do I better look after our customers following legal completion? We need to go further. We need to communicate better. We need to complete snags more quickly. In 2020, we plan to start a more structured and focused approach to customer service, which in essence means we want to be a five-star house builder at the point of legal completion and a five-star house builder in the early years of home ownership. For trading. As Keith has mentioned, HPI is flat in the main, there are some pockets of good news.
Despite this, reservations were up by 5% during the year. Notably, our private res were also up by the same amount. Average outlets also increased by around 8%. Overall, the market is strong. I'd say our best performing areas are Scotland, Manchester, and Northern Home Counties based in Milton Keynes. London and the South seems to be a bit more sensitive to the whole Brexit narrative than elsewhere in the U.K. You can often find that the rate of sale per outlet is a little slower, that shouldn't be unexpected given the current political environment. I have to stress, it's the investment in those new divisions, it's the investment in those new outlets that's driving our sales volumes.
Now for current trading. Sales in the first nine weeks since the 1st of August have been good, and I'm pleased to report that sales volumes are up by 4% to 183 homes per week. Whilst our order book is slightly down year-on-year, that's simply a product of having more completions in the first nine weeks than the comparator period in FY 2018. Finally, to close on outlook. Our new divisions are delivering our long-term growth ambitions. That said, I think our growth this year will be less pronounced. Probably, a best guess, an extra 300 homes as opposed to the usual 600. My reasoning is, I simply don't feel confident enough about the economy to push the business any harder at the moment. Whilst I don't think Brexit has had a material impact upon volumes, general elections often do.
My focus this year will change a little, and it's very much a long-term approach to running the business. I want to concentrate on building the order book. I want to lay the foundations for a new division. I want to focus on that new customer service level, drive through those cost-saving initiatives, and I'm also keen to further increase the dividend in FY20. Thank you. We're happy to take questions. Glynis.
Morning. I have a number of questions. I'm just going to keep going till you tell me to stop, I think. The first one is in terms of your WIP. Your WIP versus forward sales actually looks substantially higher than the majority of your peers. I wonder if you can just give us a little bit of color about that. Is that just the point of time at the end of the year, or is that something in terms of substantially more investment than, for example, your peers in show homes and so on? The second one, page 20, the margin bridge that you give us. Just to be very clear, where is Nine Elms in that? Is it in the other gross margin, negative, i.e. the underlying negative is more because Nine Elms is positive? Number three, you talk about HPI.
I'm wondering, are you talking HPI including that step of incentives that you're referencing? I wonder, is there any sort of regional difference within there? Lastly, the Artisan range, if it gets to 3,000 completions by the full year 2021, that's still only just over 1/3 of your product. Is it limited by the sites you can roll it out onto? Is it about planning? Why aren't we seeing it being rolled out in a faster way in order to drive those cost savings?
Do you want to do the first three, and I'll-
Okay. WIP is about 106% of the order book. It is something we look at. There is a large proportion of the order book is contracted. We just feel that it is right to get the balance between investing so people can see the product, and therefore encourage further reservations. You see the reservations are strong. We set ourselves an internal limit. If you get to, say, 120%, that is perhaps, we do not particularly want to go above that. We feel comfortable where it is based on the reservations we have got and the WIP turn that we have got, Glynis. In terms of the margin on page 20, well, that is the FY19 result, obviously. Any margin movement is encapsulated within that. The gross margin movements, including anything on Nine Elms and any other sites, goes within there as well.
When we talk about house price inflation being flat, that's a net result. That takes into account any movements on the incentive line. You don't add on incentives on top of that.
Just on the Artisan range, Glynis. I'm probably a little bit more positive than you on the summary. We've spent decades without a standard house type range. To have one so quickly adopted across the group, we see it as quite successful. It takes a year to plot it and to get planning for it, and then you need another year to build it. There's always that one or two-year leading period before it comes through on Keith's legal completion line. When you say a third of it, we expect it to be adopted on the majority of our housing sites in the fullness of time. It's an exception rather than the rule that we find it doesn't fit on a particular development.
The reason for that, it's quite flexible and efficient, so we can address different local vernaculars in different regions of the country, because you can have weather boarding, you can have brick, you can have render. It's very flexible. Ian's with us today. Ian Gorst, regional chairman. He's the author of the Artisan standard house type range. In many respects, it's getting the divisions used to standardization. I'd expect that pickup to accelerate even further in years ahead.
Morning. John Bell from Deutsche Bank. I've got two, actually. We see the same HPI trends as you do. You've talked a little about cost initiatives. If those HPI trends worsen, what levers do you have to pull to protect your margins from further erosion?
Secondly, on dividend policy, you've contracted cover already a touch. You've indicated that you're happy to do the same again this year. I wonder where are your red lines on dividend cover? How far can that go?
Do you want to do both of those?
Yeah. Okay. On house price inflation, I think it's the initiatives Jason was talking about in his speech really are our best mitigants. It's having a greater focus on costs throughout the organization, just reinvigorating some of those disciplines, which have always been there, but it's just right to bring them to the fore again. For example, our Bellway 2020 campaign is a cultural thing going throughout the group where, Jason gave an example in the presentation, but we've even introduced things like a spoil register across the group so we can look to move spoil between sites to save costs and those sorts of things, to printing on double-sided on paper. It's a wholehearted review of costs throughout the organization.
Artisan will, in due course, help us protect the margin, and also as COINS gets up to speed and improves our benchmarking, that will lead to improved procurement. If you have a period of flat house prices and continued industry-wide cost increases for a continued period of time, then that is a threat to anybody. It tends to be the case that whatever happens in the house price index, costs lag maybe 12 months or so. That's where we feel we probably are. On the dividend, I suppose I said in the speech, we don't want to commit to a dividend promise, so I'm not going to commit to a dividend cover level. I think, look, first and foremost, we still see potential for growth, and I made the point about the compounding effect.
That is still what our strategy is, to reinvest earnings to deliver further growth in the years ahead. You're right. You'll see, you're likely to see a further contraction in the cover this year in terms of the ordinary dividend. Thereafter, let's put cash back into the business to continue growing. I'll come back to what I always say. If you sustainably don't see those growth opportunities over a longer term period of time, then we will look to reduce the cover, but we don't want to get in a position where you feel that's not sustainable in all but the most severe scenarios. It kind of avoids the answer, but it's the sentiment which is within the business.
It's John Fraser-Andrews, HSBC. Two questions from me, please, sir. The first is the sales outlets. What growth do you envisage this year? What was the increase, assuming there was an increase in the current trading in sales outlets? That's the first one. The second is build cost inflation, the 3% last year. Jason, you referred to some factors that are diminishing cost inflation. Perhaps you can flesh those out and perhaps make a prediction for the current year on build cost inflation. Thank you.
In terms of the outlets, in this new current financial year, we expect to open around 110. If trading goes in line with what we plan, we expect to close around 98, which will result very broadly than average numbers increasing sort of 3%, 4%, that sort of order throughout the year. In the first nine weeks, if you just take a simple point average, outlets are maybe up 6% or so in that first nine weeks.
Just on the build cost, John, without making a prediction, but I guess history tends to repeat itself a little. In terms of sentiment, when I talk to our MDs around the country, you just tend to get the belief that they're working within a budget now as opposed to exceeding budget costs because they're getting more competitive prices back on their tenders. It seems to us, John, that a number of contractors now want to lock into Bellway and get some longer-term workload on their books due to the uncertainty. We're getting prices in that regard. Certainly from our suppliers, bricks excluded, we're getting better deals. There are better deals on the table than there have been some 12 months ago.
As Keith has mentioned, when revenues go up, costs go up a year later, and the reverse happens when revenues come back down to a flat line. Costs will follow it. It's inevitable that that cost line will soften this year, whether it's one or 1.5%, it's a guess. Certainly, all the indicators and all the feeling I get on the ground is that we're starting to work within budget now.
Morning. It's Gavin Jaggard at Peel Hunt. Just a couple of quick ones, please. The first one was just give us a feeling for what the cost, if any, there will be of getting to that five stars in the nine months post-completion. Just sort of what extra boots on the ground you need for that. Just back onto the ground rents, Keith. The GBP 14 million, I think you said, was that effectively a full drop through to profits in the year? You said high margin, but how high was it?
Well, we took GBP 10 million profit on the ground rents in the year. It's about 20 basis points on the overall margin.
Do you want me to do the Gavin, when Keith asked me that question, I say, "No, it won't cost any extra." It's very much Changing the culture, saying yes more than you say no. I think inevitably there will be costs on that line, but it's very much being more responsive. Sometimes I think that house building as a sector is a little bit more primitive to maybe the car industry or the retail sector in terms of customer service. I'm just conscious of that negative image in the press sometimes, and I just want to improve that customer service level. Sometimes it's as simple as responding quicker to an email. Sometimes it's picking up the phone more quickly than a week later.
Sometimes it will cost a little bit more because we've said, "You're just outside your warranty period, and we're going to say yes anyway." It's that sort of approach.
Thanks. Aynsley Lammin from Canaccord. Two, please. Wondered if you'd give a bit more color on the kind of autumn selling season. A few of the peers a couple of weeks ago said they're surprised how resilient it's been. Have you seen a deterioration in the last few weeks? In that context, kind of what do incentives look like, what you're having to use? Then secondly, just on the land market, are you seeing any of the caution that you were talking about, general election, a bit more caution going into this year feeding through to the land market? Have you increased your hurdle rates? Are land prices easing off a bit? Thanks.
Can I do both of those?
Okay. In terms of the selling period, the autumn selling period, Aynsley, I've been as surprised or pleasantly surprised as most, I guess. The market's been quite resilient, even in the last couple of weeks. I haven't seen any downturn, and I would almost describe some parts of the U.K., certainly Scotland and Manchester, are completely immune to the whole Brexit debate. It's strong in those areas. No, I haven't seen any downturn, and that's what's given us the ability to grow volumes year on year.
In terms of the land market, the only noticeable change I could say, and I think it's short term, is that where you've got this period of Help to Buy changes planned for April 2021, you can see a lot of competition in that space where people are encouraged to go and buy those sites of smaller mix, the 2s and 3s and 4s. There is competition in that area because people want to land in the spring of 2021 with the right product mix. I'd say more pressure, Aynsley, on margin, probably down at 23% on those type of sites as opposed to 24% where I've reported previously. Where we're investing in larger sites, there's less competition, and the margin's a little bit stronger. That's how I'd describe it.
I guess when I come back to see you in March, it might change a little because we've gone through that period.
Ami Galla from Citi. Just a couple of questions from me. You've touched upon the scope for adding more divisions over the next two to three years. I was wondering if you could outline what is the longer term scope of where you see potential growth in this country. The second tied to that is the sort of land investments that you need to make over the next two or three years. What is the overall run rate that we should be assuming, considering the medium-term growth that you're projecting?
Do you want to do?
Yeah, well-
answer?
Yeah. In terms of divisions, we're at 22 at the moment. Jason's alluded to one in the northwest, which would take us to 23. As we sit today, we can at least think of a couple of other areas where we think there's scope for investment without having to go into secondary locations. That's going to take you to a capacity of 14,000 plus, you might argue, which is sort of 30-odd% higher than where we currently are. Potential for growth remains there as we sit today. In terms of the rate of land investment, look, all other things being equal, I expect there'll be an increase this year. Whereas last year we spent cash out the door just over GBP 740, our budgets today suggest that might be GBP 850 plus in the current financial year.
Obviously, it depends whether you get deferred terms and all other sorts, but that gives you sort of a sense of the size of the increase in FY 2020.
David O'Brien from Goodbody. Just one from me, please. On page 22, just your bridge of margin normalization. Can you give us a sense of or quantify what cost mitigation you put in place yourself to get to the 19.5%?
It's not so much about trying to factor in and break it out into even more detail. I mean, I must be honest, I thought I was reluctant to put that in because I felt it was particularly precise anyways. Without getting even more granular, we've revalued all of our sites based on current costs and current prices. The majority of our orders are let for the next 12 months, whether that's material or subcontract costs. The risk is if there's further cost increases, it's FY21 where they're likely to have a more pronounced effect. That said, we feel with the mitigants that we've got in place and the fact that the rate of cost increases beginning to slow, and it tends to follow HPI, as we've said, that margin of the in or around mid-19s feels like a sustainable level in FY21 and beyond.
Thanks. Will Jones from Redburn. Three if I could, please. Just tying up on the Nine Elms site and obviously going back to the bridge and the 90 basis points, I think the math of that site being 6% of revenue last year imply that it did about a 15%-20% percentage point better margin than the group of gross, is that right for Nine Elms?
Yeah. It's high 30s was the margin.
Okay
We delivered on Nine Elms.
Got you. Second one was just around land credits, which obviously came down in the year, and I think about 15% of land value at the moment, which is quite a low ratio compared to others in the sector. Is that something you see as an opportunity to help on the cash flow front going forward?
Well, I don't think we need to bolster the cash flow. I suppose it's what I always say, Will, we genuinely view it as a source of financing. If you don't have conditionality, if it's a mandatory payment, which you can't wriggle out of, then it becomes how do you get the best financing deal? Do you borrow from the banks, or do you borrow from a land creditor? It depends what their current position is. We're always trying to defer where it makes sense to. Equally, if we can get a decent discount for paying upfront, and it's more than our cost to finance, and you're not constrained by capital elsewhere, we'll go down that route. It's very much on a contract by contract basis.
I guess the last one was just touching on the comment around larger sites that you mentioned a couple of minutes ago, Jason.
Yeah.
Historically, you've been a bit more averse to the bigger sites as a business compared to, say, the pack. Is that something you're kind of reconsidering?
I'd say Keith's always been a bit more cautious, Will, than me. I think, on a serious point, I think with the size of the business today, we've got to make those investments because some of our divisions need that certainty of supply going forward. What often we do, Will, is that we'll dual out those type of sites, so we'll have either two Bellway outlets if it's different product mix, or we'll have a Bellway in the Ashberry. We'll only do them in locations that we feel are a good long-term bet. We'd only do them in locations where or we'd only do them with product mix that we think is sellable. We're not taking big risks as we see it.
All the locations that we've identified are what I'd call strong, affordable, smaller mixes, and in divisions that are large that can accommodate that sort of size of site, really.
Just to add, it's partly a function of size. The bigger you are, the more you can accommodate. You've got net assets of almost GBP 3 billion. A handful of extra large sites doesn't dilute the risk profile or increase the risk profile, rather. You can accommodate a few more without changing the risk of the business.
You get to that point, Will, where you're buying 13,000 plots a year, and because we've had this big focus, Will, on outlets, which has delivered for us, we're really pleased with it. When you're buying 100 sites at 130 units each, you're buying two sites every week. Now, that's quite a load to put through the business because we do it all at head office. If I want to gently increase that 13,000 up to 15,000, I need to complement it with some bigger kit, to just give us that boost in volume. All of those plots you buy, sometimes you get a bit of bad news and whether it's legal or planning, some will drop out the system. There's always a bit of comfort that you need in the figure.
Morning. Chris Millington at Numis. I just wondered if I could push you a bit more on incentives and just find out kind of what level they are maybe versus this time last year. Quick comment on PX policy. Is there a point you wouldn't want it to go beyond? Can you just remind us quickly on the benefits of the Artisan range? I vaguely remember you did outline that in a previous presentation. I just can't recall exactly what the figure was.
Yeah. Incentives. I always take the incentive figure with a little bit of a pinch of salt because it's quoted as a % of our release price, which might be different in every division and every site. On average, it's probably just over 3%, for FY 2019. In FY 2018, it was close to 2.5%. You're talking about a sort of 60, 70 basis points movement, which, as I said earlier, is included in that house price commentary we gave.
That feels like it's sticking today through the start of this year.
We're not seeing it nudge up, no. Every site's different obviously within there, but we're not seeing a moving trend on that. On PX policy, it's almost a divisional policy. Every division has a limit, and those divisions which perform well, i.e., have a good turn of PX and not trading at a loss, we'll give them a little bit more. Those divisions which don't perform well because they're not buying it in correctly, we'll give a little bit less, and we'll try and get it under control. Not that it's out of control, but we'll try and rein them back in. Broadly speaking, that works out at being around about GBP 3.5 million per division, which probably gives you scope to get up around about GBP 80 million or so. Look, we're turning it quite well, PX, Chris. It's about 8% of completions.
The holding time is similar to what it was last year, at around 15 weeks or so. The loss you see through the income statement, a lot of that relates to the servicing cost of PX. You've got to pay a lawyer, you've got to pay an estate agent. It's kind of an incentive, but in a different part of the P&L. It works well for us. Do you want to do Artisan?
Just on Artisan, Chris. I think as Glyn has alluded to it, we believe we've got embedded savings in the Artisan range going forward. We're always reluctant to promise you something we can't deliver. Because it's only in its infancy, we think those savings will come out in the fullness of time, which will enable us to maintain our sort of 19.5% margin going forward. The obvious cost benefits that we're experiencing at the moment is savings on professional fees because we're designing it once. Savings on marketing costs because the brochure's done once. We haven't got 22 divisions doing a new brochure. We think build periods will become shorter, which will save on site overheads because there will be familiarity in terms of building the same units. We believe there will be reduced maintenance costs in the future.
Also the specification, which is now standard, from Newcastle to Bournemouth to Cardiff. That improves our buying power. It gives us consistency. We could show a customer in Milton Keynes the same home as in Guildford in Surrey. It just gives us that flexibility. The opportunity's significant, but it wasn't inefficient to start with. I'm always reluctant to say, "Look, Chris, I'm going to save 50 basis points on the margin," because the divisions weren't inefficient. Some were, but the majority weren't. It's the right direction of travel, as Keith would say. It's a good message, and it will improve the numbers going forward.
Thank you.
Thanks. Gregor Kuglitsch from UBS. Maybe just a final question. I think you've been quite explicit on the sort of margin trajectory also in the midterm. I guess from our side, and I guess the market's perspective is how do you factor in the kind of changes to Help to Buy? In the short term, you still have the support, then 2021 steps down a bit. 2023 and beyond is quite in the distant future, how do you budget for that when you think about Are you kind of saying that as the Artisan range maybe ramps to whatever, 70%-80%, you are going to give some of that back through pricing, through incentives, perhaps when Help to Buy expires? Is that kind of the big picture thinking?
Can I start, and then you do the guesswork with Help to Buy.
Yeah.
I always get excited about margin because we get more conversations about margin than anything else. Where Bellway are in the system in terms of London, and you can see in our presentation that as Nine Elms comes out of the system, our margin comes down. There are other house builders that are coming out of London, new and old, where their margin's going up because they've got impaired land in London because they were too exposed to a particular market. I'd take our position all day long that we've had the good profits at 22%. We're coming down, which is understandable, and we can maintain that margin going forward. Can you just do the bit on Help to Buy and what's going to happen in the future?
I was hoping you would do the Help to Buy bit and I could do the Look, I think the reality is when we're buying land now, as Jason alluded to in his presentation, it's more important to get the right product mix, a saleable product mix on there. To be frank about it, I think we'd rather have a site which we think sells and has got robust assumptions on it at a tad lower margin than pretending that it's 25% and having a load of houses which don't sell. That's more important for the health of the business. It's getting the interchange between sales rate, which you need as a volume house builder, and trying to squeeze out the last pips of a margin on a site which wouldn't sell. We're trying to factor that into our land buying.
You can see what we're trying to do on the cost initiatives going forward. We talk about replacement products to Help to Buy. We're working with our peers to come up with what the top-up might be, certainly in 2023, and whether we can do anything in 2021. There are other things that we can do there as well. What will the margin be in three years' time? Look, I don't know, is the honest answer, but we're doing what we can to maintain it at that sort of level.
Thank you.
All done. Thank you very much. We're here for a while if anyone wants to chat. Thank you very much indeed.