Well, good morning. Thank you for joining us. A reasonable or a better turnout than we'd hoped, thank you. Welcome to Bellway's half year results. As always, I'm sure there'll be keen interest in current trading and outlook. First I'll draw your attention to a few key highlights. Housing completions were slightly ahead of last year with a new record volume of just under 5,700 homes. Notwithstanding current inflationary pressures, underlying PBT was down by less than 5% at GBP 312 million. Interim dividend is maintained at 45 pence per share. Reflecting our responsible approach to capital allocation, we've announced a share buyback program of GBP 100 million.
Market conditions in the first six months have been challenging and given that backdrop, we've focused our attention on cash generation and cost control, unwinding the order book, accelerating the delivery of affordable homes, and closely managing our cost base to help mitigate inflation. It's these actions that have led to a strong first half performance. Despite a more modest sales rate, particularly through that autumn period, the order book is still strong and the business remains in a healthy shape.
We have got depth to our land bank, scope to increase outlet numbers, cash in the bank, a strong track record on delivery, and the ability to promptly return to growth when the time is right. It's with that confidence in the business we can return excess cash to our shareholders through a buyback. Keith will better articulate our capital allocation strategy, but as usual, our approach is a very balanced one. For our first half results with Keith.
Okay, thanks, Jason. Good morning all. The financial performance for the first half year was solid. It was driven by the strong order book. It has helped us to deliver record volume and a record average selling price. As already mentioned by Jason, underlying profit before tax was GBP 312 million, which is a slight reduction compared to last half-year's peak, with this driven by margin pressures. Jason also mentioned in his introduction our priorities to build out the order book and to accelerate the production of social housing plots. Because of this plan, and despite the weaker trading conditions, housing revenue still rose by 1.6% to over GBP 1.8 billion. This was achieved even though production constraints were still evident across the sector, particularly at the start of the period.
In addition, this approach has resulted in social housing completions rising to 21% of total volume. The ongoing rephasing of construction programs means that the trend towards affordable housing will gather pace, and it will therefore represent more than 25% of volume output for the full year. That higher weight in the social homes will also dilute the FY23 average selling price, which as I said last October, is likely to be around GBP 300,000. While the market has been challenging, demand in certain parts of the country has been stronger than others. For example, our Manchester, Northern Home Counties and East Midlands divisions have all shown resilience, benefiting from their offering of affordably priced homes in high demand areas.
Our second brand, Ashberry, grew to 11% of completions, and it has proven to be valuable in a slower market where planning still constrains new outlet openings. Where appropriate, Ashberry allows us to offer two selling outlets on larger sites, and this provides greater choice to customers and helps to stimulate sales rates. Completions in London reduced slightly to 6% of the total, and this reflects lower land investment in earlier years when we sought to move away from higher density London schemes given lower demand affordability constraints and their dependency on Help to Buy. Underlying gross profit was close to last half year at GBP 389 million, and there was an 80 basis points reduction in the gross margin to 21.5%.
The prices achieved on completions in the period largely reflect those included in the order book at the start of the year. Going forward, we expect an increased use of sales incentives and in addition, build costs are still rising. The combination of these factors means that there will be ongoing gross margin compression for the remainder of this financial year and further pressure into FY24. The administrative expense increased to GBP 71 million, in part a reflection of the additional costs of our recently established building safety division. There are also inflationary challenges with upward pressure on employee related costs, given the continued demand for skilled resources. We're keen to preserve the integrity of our divisional structure so that we don't damage our longer term prospects and to ensure that we are well prepared in the event of a market recovery.
At the same time, we are keeping a keen focus on cost control. In that regard, there has been a moratorium on new recruitment. We have commenced a workforce planning program and the payout on employee incentive schemes, which can form a large component of remuneration in the house building sector, is likely to be lower than last year. As a result of these actions, I now expect the full year administrative expense to be around GBP 145 million, which is below previous guidance of over GBP 150 million. After considering overheads, the first half underlying operating margin was 17.6%, and this will moderate for the full year given the predicted reduction in gross margin. In addition, the administrative overheads will not be absorbed as efficiently due to the higher weighting of housing revenue in the first half.
It's too early and uncertain to guide to an operating margin for FY24. The trend for margin compression will continue and this will be more pronounced because of lower volume output. That said, whilst there is likely to be near term margin compression, we should not be too downbeat when looking out over the medium term. In that vein, mortgage rates have stabilized, inflation is forecast to moderate, employment levels are high. Wage rises are in part offsetting rising living costs. All this means that new homes remain affordable in a historical context and coupled with structural underlying demand, there is a strong foundation for medium-term margin recovery once this period of uncertainty passes. Moving on. Joint venture profit was very modest in H1, but for the full year it is likely to be a small loss.
The underlying interest cost remained in line with last half year at GBP 6 million. For the full year, I now expect an underlying net finance cost of around GBP 13 million. This is lower than previously expected, mainly because of higher interest rates on cash deposits. The effective tax rate was 24.8%, and it should be close to this for the full year before rising to just below 29% in FY24. As you know, we signed the government's Building Safety Pledge in April last year. Following this, we have recently signed the Binding self-remediation terms contract. The consequences of not doing so would eventually include a future prohibition on new planning consents and the withholding of building control approvals.
While some of the terms of the SRT are onerous, particularly in terms of the reporting requirements, fundamentally and importantly, it does not change our financial liability. On a positive note, the SRT clarifies the required standard of remediation, or at least it does on paper, but the practical interpretation of these standards by the wider industry will no doubt continue to evolve over the coming years. Aside from the SRT and in the usual manner, we've updated our cost estimates in relation to building safety. This has resulted in an adjusting charge of GBP 6 million in the income statement. The charge includes a GBP 3 million adjusting finance expense, which relates to the unwinding of the discount on the provision. Because of higher gilt rates, this will increase to around GBP 11 million for the full year.
The remaining charge, also of GBP 3 million, is recognized through cost of sales. It is stated net and therefore after the benefit of GBP 50 million of recoveries. These relate to one-off settlements across several sites which we have been working on for several years. Offsetting this is an expense of GBP 53 million, where we have taken the opportunity to prudently revise cost estimates on existing schemes. We've also considered a widening scope of works beyond just the external envelope. The requirement for building owners to undertake regular fire risk assessments should mean that fewer new issues are likely to be discovered in the future. Importantly, our provision also includes an allowance for as yet undiscovered problems. As ever, our approach is prudent, it's considered, and our focus is to get on with the remediation works. The balance sheet's included for reference.
I'll talk through the most material items, and as you know, we curtailed land buying activity, back in autumn, but our total owned and controlled land bank remains similar in size to this time last year at around 58,000 plots. Planning is still frustratingly slow, but the proportion of plots with detailed planning permission is gradually beginning to increase. At the same time, we continue our focus on longer term strategic plots, securing interests for a modest initial capital outlay. Land prices are then generally agreed based on market conditions at the time of acquisition, which can be some years down the line. Overall, our land bank is strong, and it comprises some 100,000 plots. This means we can remain very selective, proceeding only with contracts that offer compelling financial returns.
In terms of work in progress, the balance has increased to GBP 1.6 billion, in part reflecting a greater weighting of plots towards later build stages. In addition, we've also invested in site infrastructure and limited early stage foundation work in preparation for site openings later this calendar year. We will retain strong control of work in progress to ensure continued balance sheet resilience. Our investment in part exchange properties is still low at only GBP 11 million. Part exchange has to be used carefully as it can be costly and it also ties up capital. That said, we have significant balance sheet capacity to invest more in PX, and this will help overcome some of the problems we face in chains, which can be a cause of a delay and, in some instances, cancellations. Our cash position remains very strong.
We ended the period with net cash of GBP 293 million. The average month-end cash position over the past six months was close to this at GBP 253 million. This demonstrates the strength of the group throughout the period. I also expect that we will remain in an average cash position throughout H2, despite the lower year-on-year sales rates and the share buyback program. Land creditors remained low at GBP 372 million, and adjusted gearing inclusive of land creditors was only 2%. Our balance sheet provides resilience, strategic flexibility, capacity to invest in land, and the ability to return cash to shareholders. In that regard, we are maintaining the interim dividend at 45 pence per share.
Subject to market conditions and shareholder approval, we also expect to maintain the final dividend in line with last year at 95 pence per share. We've previously said that we expect the dividend cover to reduce to around 2.5 times underlying earnings by July 2024, and I still think this remains a sensible long-term target. In addition, if there is a year-on-year reduction in earnings in FY23 and in FY24, our balance sheet provides the scope to temporarily reduce cover below 2.5 times. Further to the dividend, and as already mentioned, we are today announcing a GBP 100 million share buyback program with an initial GBP 50 million tranche to commence imminently. The rationale is that volume is likely to reduce next year and our land bank is strong.
In this context, we believe we have surplus capital, which will generate more value if it is returned to shareholders. Our capital allocation strategy is a balanced one. Maintain a healthy dividend, maintain the ability to selectively invest in land, and complement that approach with a share buyback. Briefly, you will recall that carbon reduction is a cornerstone of our Better with Bellway sustainability strategy. In respect of our Scope 3 targets, we continue to work with the supply chain to look at alternative building materials. We are also undertaking several research and development projects, including trial sites, and in order to design and test solutions to reduce regulated Scope 3 emissions in line with the requirements of the Future Homes Standard. Jason will discuss progress in relation to the building regulations. The flagship of these research projects is Energy House 2.0 At the University of Salford.
Here, we have constructed a Bellway Future Home inside a temperature-controlled chamber which can mimic environmental conditions experienced by 95% of the world's population. We are testing the energy and the carbon efficiency of a range of technologies, including air source heat pumps, infrared panels, mechanical heat recovery, and enhancements to the fabric of the building. It can get quite technical, but it is an interesting project, and we will look forward to welcoming many of you to our Energy House project in May in conjunction with our research partners later this year. To summarize today's financial part of the presentation, we're still on track to deliver around 11,000 homes this year at an overall average selling price of around GBP 300,000.
There will be a further moderation in the underlying operator margin from the 17.6% achieved in the first half. We've maintained the interim dividend and we're also returning GBP 100 million of surplus capital to shareholders through a buyback program. Finally, our balance sheet is solid. It provides continued resilience, strategic flexibility, and the capacity to invest in land when the timing is right. I'll now pass you back over to Jason.
Thanks, Keith. I will start with trading. The trading period from the first of August through to January is probably best described through the first slide. In the first nine weeks, private reservations were lower than the previous year by 27%, as mortgage rates had already started to rise, and we felt the first effects of the September budget. The subsequent three months through to December, private reservations fell by 60%, and then you can start to see the recovery building in January. Overall, in the period, total reservations were down by a third, with private reservations down by 44%. Cancellations averaged 20% in the first half, but since the first of February, that has reduced to around 15%. Before I go on to current trading, I just wanna take a quick look at the mortgage market.
Interest rates or the mortgage market has now started to settle, with 75% LTV rates now at least 1% lower than their peak last year. Those with bigger deposits can readily access a five-year fixed rate now at below 4%. However, if you look at the 95% LTV rates, product availability is still modest. With the end of Help to Buy, there's clearly a gap in mortgage finance for first time buyers. That said, underlying demand is healthy. Customers are adapting to the new mortgage rates and trading is certainly improving. With regard to current trading, in the first six weeks since the first of February, there's been a gradual week-on-week improvement in private reservations.
Our average private sales rate in that period was 135 homes per week, still down by 40%, but that's measured against a very strong comparator period. Usually as you know, we report sales in absolute numbers as opposed to a rate per outlet. To give you some context, and this is important, our most recent selling weeks in March have consistently delivered a rate per outlet of 0.6. House price inflation has all but disappeared, and whilst we've seen very little pressure on list or house prices, the cost of selling incentives has grown from just over 1% to around 3% and higher on some targeted sites. The order book is understandably lower at around 5,800 homes, but still strong with a value of GBP 1.6 billion.
Notably, we are 95% sold for the current year. Turning now to land. You may recall our appetite and strategy for land investment back in the summer of 2020 was always to grow outlet numbers to mitigate the loss of Help to Buy. That approach is still as important as ever as we now navigate a softer selling environment, and that environment may very well continue through to the next general election. Outlet openings are always difficult to forecast, but even more so with the current planning system. Although we do expect outlet numbers to increase in the summer of this year, that will help support sales volumes in softer trading conditions. If I could refer you to the land bank chart.
Our owned and controlled land bank is slightly ahead at 58,000 plots and represents around five years of supply. You can see from the slide where we were front-footed with investment back in FY21 during that early phase of the pandemic. This resulted in our owned and controlled land bank growing by 18%. Today, we only invest where we see compelling land opportunities, and that strength of land bank allows us to be very selective. In the past 6 months, we've contracted on a further 2,400 plots, of which about half of those have walk away clauses. By that, I mean it's at Bellway's discretion whether we complete on the acquisition. Where our appetite is greater is within Strategic Land.
We've continued to invest in our Strat Land teams and also made a further corporate acquisition of a Strat Land company which holds 52 sites and around 6,000 plots. Interestingly, over the past two years, you will have seen the strategic tier of our land bank grow by 50% to 42,000 plots, providing Bellway with a solid footing for longer-term growth. Turning to production. Build cost inflation was approaching 10% in the H1 and whilst costs are now coming down, they're not falling fast enough. Inflationary pressures are still stubborn in parts. Some suppliers and subcontractors are still willing to offer us discounts for visibility on workload into 2023 and 2024 and some have extended fixed price periods.
Cost increases for plasterboard, for roof tiles, for windows are all still persistent with suppliers demanding increases of up to 10%. We are certainly in a period of a transition period of falling cost, but it's a little slower than I'd hoped. With regard to the availability of labor and materials, after two years of strong demand, those pressures have started to ease, and I don't envisage any production problems in the short term. Given the stubborn inflationary pressures, we continue to look for further efficiencies to mitigate margin pressures. Our Artisan standard house type range is now going through its first review in order to accommodate the interim building regs in June of this year. We're taking the opportunity to value engineer some design elements following the experience we've gained across the past two to three years.
Items such as ground drainage, proprietary retaining wall systems, and better roof designs to accommodate new PV panels. Artisan is now plotted on 95% of all planning applications and will account for over 40% of completions this year. Keith's already mentioned Energy House, but out in the field, we've got numerous trial sites across the U.K. to meet Future Homes Standard and determine which products are both practical and cost-effective for both our customers and their site teams. As those pressures start to abate, the focus for our teams is clear. Build teams are charged with closely controlling WIP and accelerating the delivery of affordable homes. Commercial teams are faced with the challenge of driving down costs. Land teams are focused on planning to drive outlet growth.
Our sales teams are being retrained not only to rediscover the art of selling, but also to be conversant with incentive campaigns and the new building regs, building regulations. Just one final point. Whilst Keith's outlined our approach to admin savings, I am keen to preserve the long-term health of the business, and I still plan to continue with our Young Person's Intake Program in September of this year. It's worth just spending a few minutes on customer first, our Better with Bellway approach. We've again been recognized as a five-star home builder for the seventh consecutive year. As I mentioned earlier, it's been a tough six months, and our eight-week survey score has moderated from a high of 94%, and that's a product of extended build periods and pressures from the supply chain.
We have a range of initiatives underway for the year ahead. One that we recently launched is our Meet the Builder approach. Adjacent to all of our future show homes will be a partly constructive view house where customers will be able to see the internal workings of a house to gain an insight into the build process and ask questions to our site teams. The slide shows a typical example from our East Midlands division. In addition to Meet the Builder days, we're also providing customers with information on sustainability, energy saving benefits, and a guide to anticipated running costs in our new homes. All these measures are designed to underpin confidence in the quality of a Bellway home.
Now before I finish off with outlook, I just wanted to mention the CMA housing market study. The scope is quite far-reaching and goes beyond the perennial investigations into land banking. The study is designed to better understand industry practices such as land acquisition, build-out rates, and the sales environment. The results are planned for early 2024, and I would hope that the findings will highlight the challenges faced by both small and large house builders and will have a positive effect on future housing policy. Finally, outlook. We're 95% sold, so you can expect a volume of around 11,000 homes. In October, at our prelims, we'll be in a better place to offer guidance for FY24, though it's clear that volume output will be notably lower than FY23.
Given the strength of our balance sheet, we plan to maintain our dividend for the full year while retaining the ability to re-enter the land market when the timing is right. Thank you. Keith and I are now happy to take questions.
Ami Galla from Citi. Just few questions from me. The first one was really on the volume side of the story. Are you doing anything differently to increase volume, reservations in the business? Are you looking at bulk deals? Are you aggressively increasing your contracts with Housing Association local authorities, maybe into 2024? The second one on, I know you're not talking of FY24 guidance, is there scope for further cost mitigation measures as we think about the overheads in 2024 when volumes do come down? The last one really on the land market, can you give some commentary or color in terms of what's happening to prices in the land market?
You do two. I'll do volume, Ami. There isn't one big hit in terms of volume, but you've heard us talk about accelerating the delivery of affordable homes that we can. In addition to that we do a small number of bulk deals with housing associations, whether it's HAs or the MOD, you know, but I wouldn't do them on scow. On top of that, we have got incentives campaigns that we're running at the moment. We'll run a new one across Easter to, you know, promote the sale of private homes too. It's a balanced approach, as you'd probably expect me to say. I don't want to start heavily discounting properties when the market's recovering. I feel quite confident about the market going forward.
That's where we are in volume. There's a limit to what you can do to 24 volumes because your order book has been affected by that period in 2022. I think we're faced with that, and we're looking beyond that period. I'll finish off with the land market. It's an interesting question because I'm sure someone wants me to say that, you know, land prices are coming down or. The truth is we have had some discounts on existing contracts that are conditional, yeah, and land that we've bought, and I'd say discounts of 10% on occasion, you know, a little bit more. In many cases, landowners and land sellers are sitting on their hands and waiting for the market to recover before they bring land to the market.
There's a bit of wait and see approach at the moment. We certainly see if there's a strong location in a robust residential area, a good margin, you know, I'm talking high twenties. You'd buy a little bit higher than you used to just in case, you know, that incentive line gets a bit bigger, so you can accommodate it. We'd still look at buying. There's not huge numbers of opportunities on the market.
On costs as we go in to next year, our intention isn't at the moment to cut more deeply. Sadly, we've already lost around or will be losing around about 100 people through our workforce planning program, and that's people we brought into the business when we were planning to grow volumes above the 11,000. At the moment, our thoughts are we want to maintain the divisional structure, and we want to maintain that core of people who are still in the business, and that will help us to recover more quickly and hopefully get back onto a trajectory of growth in due course.
I think we're very mindful of the lessons we learned in the GFC, where we cut deep and we cut hard, and it takes you a long, long time to recover. Currently, as you go into FY24, and based on how the market seems to be recovering, you know, the overheads will go up by inflation again as you go into the next financial year.
Just one thing to add, 'cause I have this debate with the teams. You know, our business has got a decent land bank. We're actually growing outlets. My outlets are growing, so I need more people to sell homes, more people to build homes on a wider... There's a limit to how much you can cut on overhead.
I'm from Investec. Just two, please. First of all, on the build cost inflation, you said obviously it's stickier than you may have expected. Just any more color there, where you're seeing prices come off, which areas are sticky? You know, for calendar 2023, what would you expect the run rate to be, from 10% to 5% or just interested in your view there. Second question, just on the dividend, obviously maintained at 140p this year. Is it your intention to maintain the 140p for FY24? You know, obviously, consensus expects about a 40% fall in profits. If that actually happens, would you still pay that intent to pay that 140p, for example? Thanks.
I'll do inflation and it's best guess. You know, I was hoping, Ainsdale, that build cost inflation would be coming down faster than it is. Certainly it's our ambition. If we were at 9% in the first half, we wanna see that halved by the summer, down to 4.5%, and that's certainly a target. You hear it in the wider market beyond house building, and we're experiencing it. They're just stubborn parts, whether it's particular materials or certain parts of the country that are a bit resistant. Our target is probably, you know, between 4%-5% for the summer.
On the dividend in FY24, it's a fair question. I would start by saying clearly the decision will be taken at the time, we're not giving prescriptive guidance to FY24 at this stage. What I would say is we've got the capacity to maintain the dividend in FY24 at what we expect to be the FY23 level and what was the FY22 level at GBP 1.40 per share. We believe the balance sheet is resilient enough to withstand that, notwithstanding the likely reduction in earnings in FY24 and the fall in volume. We believe, look, taking into account all of the things, buybacks, land and all the rest of it, that we've got the capacity to do that.
Yeah. Thanks.
Yeah, thanks. Jon Bell from Deutsche Bank. Two from me. One of your peers is rolling out air source heat pumps fairly aggressively on the premise that its buyers are asking for them. Are you hearing the same thing from your buyers? Where are you up to on that journey? The second one, I just wonder whether you could comment on London market conditions. I know you called out a couple of the stronger regions, perhaps you could just comment there. Thank you.
Jon, on the air source heat pumps, every one of our divisions, all 22 of them will be trialing sites, you know, through 2024. We don't plan to bring air source heat pumps in on scale ahead of that. Our divisions will be learning from 2024, so will our supply chain, so we can start training up the workforce. We're sorta a year ahead, but everyone's gonna get that training. In terms of... Sorry, your second point was?
Market conditions in London.
Well, I was only saying that this morning on London. You know, there was a lot of commentary last year that, you know, London was suffering and, you know, it was overpriced. I mean, our exposure to London is what I call affordable London, commuter belt, you know, edge of London. Two of our bigger developments currently on sale, Barking, Bexleyheath, where we've got big volumes, are two of the fastest selling sites in the group. You know, that's at a price point of GBP 350K. I couldn't comment above that, Jon. Certainly that space, even first time buyers, Jon, that is still moving. We've got new developments coming out, you know, Stratford, Greenwich, Croydon, somewhere else that escapes me. You know, we're carrying on in that affordable space. I'm quite confident with London at the moment.
I was just gonna add on the air source heat pumps, not to labor the point, but if you come to our Energy House in Salford, you see these things are quite big. They take up quite a bit of room, so it's not always obvious where they're going to go on a plot layout. If you've got a certain design of homes, it might lend itself to that. There's one issue. Two, they're not necessarily the quietest thing in the world, so there's a customer care issue to think about there. Thirdly, whilst they reduce carbon, they can certainly where energy costs now are more expensive to run than a gas boiler.
You know, that's why we're having all the trials and trying to get through there before we say, "Let's roll it out everywhere." It's not necessarily an easy solution. It's probably one of the more complicated bits of meeting the Future Homes Standard, is how you deal with those.
Thanks. Will Jones from Redburn. Three, please. First, if you can just help us with how to think about gross margin evolution as volumes decline into FY24. I think you talk about site duration impacts on your margin, and we had that back in 2020. Have you kind of taken that hit, if you like, within the first half margin, or should we think about it continuing to be a factor through 2024?
The second is just really how any comments on how price sensitive you think the market is at the moment either way. I mean, you talked about three regions where the market's good. I mean, is there any scope there to nudge prices ahead by 1%-2%, or is that just off the table? Finally, just on outlet openings, are you proceeding with everything you can planning-wise at the moment, or are there some you're holding back tactically? Thanks.
Do you want to Start? No.
Yeah. On gross margin, I mean, it's a trick. We're not going to be as prescriptive as what we would normally be on gross margin because there are so many moving parts. To the extent where we've experienced slower sales rates to date, and that's had a knock-on impact on the duration of sites. We've put those costs into our valuations, and a typical site costs, I don't know, GBP 25 ,000 to GBP 60,000 per month to run, depending on how big it is. We've reflected those. Now, to the extent that sales rates revert to where they were in the autumn again, that would be another hit to take, but it's broadly about right in terms of those extended site durations at the moment.
You've got an environment where you've got flat house prices at best, increasing incentives and rising build costs, and not all of that can be factored in. I don't know what build costs are gonna be in five years' time. That's where the threat is. If you look at the anticipated margin in our order book, that's probably between 20% and 21%. Sometimes people think that's fixed. It's not. That's an expectation as to what we'll deliver. Of course, all of those sites still have live valuations, and if our assumptions change, that can go one way or the other. Lots of different moving parts, I guess, and it's hard to be more precise than that.
I would say, look, on the upside, sales rates are gathering pace, headline prices remain firm, cost inflation seems to be coming down, but there's obviously those downside risks again, which mean it's likely to fall into FY24.
I think on prices, Will, you're right, it's price sensitive, but we're sort of in a market now where people want to deal, they expect to deal. That's the environment we're in. I would, you know, probably expect, wouldn't be surprised if that incentive line grows a little bit more. You know, mentioning to Glynis this just before the start. You know, incentive's another word for a discount, isn't it? You know, that is a discount to a house price. I would expect there to be a bit more pressure, but that's not a U.K.-wide thing, you know. I guess I said in the presentation, you know, house price inflation has all but disappeared. There are some robust selling places where, you know, we're not using incentives at all, Will.
You know, places like the northwest of England that are very robust. I'd suggest your incentive line may grow in, you know, the southwest, where it's a bit quieter, or the southeast, where prices are very full. In other places, parts of the U.K., you know, that incentive line will. You know, you might even see a little bit of inflation. That wouldn't surprise us. It'll be geography-led as you move into 2023 and 2024. With regard to outlets, I would say I've got one site that I'm holding back, and that's because someone wants me to put an external staircase on it, Will. Not because I are not opening it. We are flat out as a business. All our land teams are working on the planning environment to aggressively open outlets across the U.K. No, we're not holding back. You may. Sorry.
Why wouldn't they? Thank you. Chris Millington at Numis. I just wonder if you could give us a bit of a reference point to the sales rates in March this year, back to pre-COVID trends. Obviously, we've had two quite distorted years, and one of your competitors referred to kind of tracking back towards 2019. I just wonder if you could comment around that point, first of all.
I think you may be referring to Barratt, which was an interesting statistic. We haven't always, as you well know, Chris, measured our rate in rate per outlet. Ours are a guide as opposed to, you know, exact science. Certainly we think that pre-COVID, our rate per outlet was around 0.75, and we're currently at a good 0.6. We think the market is very healthy at the moment compared to where we've been. We see that as a real positive, a real positive.
Okay. Thanks, Jason. next one's really just about distribution of margins. Keith, I think you might have mentioned it a year ago about the distribution across the land bank. I just wonder if there's been any material change. Obviously, there's been a bit of compression at the gross margin level. just curious about the thoughts there.
No, because our land bank. I mean, it's probably worth explaining this. We've been proactive in the land market, and initially, that was driven in the months immediately after COVID. If you remember, we were coming out of a period where you had flat house prices, rising costs, particularly in London, and then you had COVID, which extended everything. All of those additions to our land bank have been value enhancing. They've strengthened the margin in the land bank overall. We've started with a robust, sort of at least 23% in that top tier of our land bank with DPP. Now, yes, I'm sure there's some compression on that as a result of what house prices have done and build costs, maybe 1%-2% or so over the past six months.
That's a sort of an educated guess rather than, rather than a precise science. You're starting from a higher position than what we would have otherwise been. You know, we would always suffer that compression no matter what we'd done. In terms of the distribution, we've got half a dozen sites, if that, with margins sub 10%. That's nothing to do with the market. That's 'cause you'll always have half a dozen sites where it doesn't go as well as you'd planned. So the overall land bank has got a healthy gross margin.
Thanks, Keith. The last one's just about, you mentioned about ramping back up and wanting to keep kind of bench strength across the firm. How quick do you think you could ramp up if the market came back in 2024, 2025?
We'd certainly see a bounce back in 2025. I guess it's difficult to see you can match 22 volumes or 23 volumes, 'cause they're pretty similar in 2025. You'd certainly be walking towards that space. It's how brave you are, Chris, in terms of investing in WIP. Don't discount, and I say this to lots of non-operational people, and I don't say it as an insult, but there is a step change in specification. You know, this is a generational thing, what we're doing. We're designing out fossil fuels out of homes, and that could cause a hiccup in the supply chain and the delivery of new homes. I'd guess those two things, you know, confidence investing in WIP and your change of specification might not get back you to where you was, but you'll be heading that way.
That's helpful. Thank you.
Glynis.
Thank you. Glynis Johnson, Jefferies. A few if I may. The acquisition in Strat Land is intriguing, so I'd just love to understand a bit more about why you did that M&A in Strat Land. Also just the capital allocation between Strat Land and maybe offsite manufacturing, given the standardization that you are bringing in through Artisan. Secondly, part exchange. What's the scale that you will go to on part exchange? Just lastly, the practical interpretation of the standards of remediation, what does that actually mean? Does that mean that actually you think there are ways of being more efficient in terms of remediating, or does that mean that actually there's gonna be a huge cost creep because actually the practicalities are nowhere near what's on paper?
I'll do the first two.
All right.
You do the last two.
Yeah, yeah.
The idea on Stratland, there was a period when we were talking about delivering 12,000 homes, not too long ago, Glynis. Buying that volume of land in the open market without having the benefit of a decent Strat land bank is high risk, and it's pretty brutal. We felt that investment in Strategic Land, coupled with our longer term growth ambitions is the right thing to do. I would hope, despite the dysfunctional planning system that by 2025 our Strat land bank allows us to pull 20% plus through the Strat land bank. That's the ambition. It certainly gives me a little bit of flexibility.
Whilst I'm not buying much land at the moment, Glynis, we are working bloody hard on planning to bring that Strategic Land through in future years. The Stratland company that we bought was a second, you know, smallish acquisition, and it's a combination of options, promotion agreements and freehold Strategic Land. It's a good, you know, three to five year investment for us whilst we're building up our Strategic Land teams in-house. On modular. You know, I'm not a big fan of modular housing. I've seen it, you know, being manufactured. I've seen it on site. We do now, you know, by this summer we will have an entire region in the north in Scotland that's all new developments will be in timber frame, Glynis.
That, that will be five divisions across the group. Once we've bedded that in and the house types are updated to reflect the new building regs, you know, that gives us opportunities going forward, whether you've got, you know, a timber production shed doing something in the future. Keith, can you do PX and SRT?
Yeah. On part exchange, it's 1%-2% of reservations at the moment, and it's not unusual for it to be 5%-10%. And we've had, you know, a balance sheet investment of GBP 50 million-GBP 60 million in the past. I suppose their frame's a historical position in terms of what it might reasonably get to. It is a useful incentive and, you know, if our divisions had their way, we'd use it all the time. But it's all you're doing is swapping a nice, shiny new build property which looks good and is energy efficient and with a secondhand tatty thing which needs to be refurbished. I'm a little bit more cynical on it, as you might be able to tell.
It is a useful tool, but it's important that it's very well controlled 'cause you're just almost shifting profit a little bit about. It will increase, but we have to use it in the right places and make sure we pull the right levers on it. On PAS, I mean, it's useful for me to. Sorry. On the remediation standard, on the SRT, it's useful you ask that because the point I was almost trying to make was we've cautiously assessed our buildings in line with current building regulations and the requirements as to what they might say. You've got this thing called PAS, which is the Required Standard of Remediation on External Walls, which is intended to be more proportionate.
That, in theory, should mean that there is a possibility for savings in due course. I wouldn't go away and predict those because the reality is Assessors are very cautious, and for you to go and put your name to a piece of paper which says, "Well, I know building regs say this. I've now got a new standard, which allows me to be more proportionate, but you've got all this litigious background. I'm gonna be a bit more pragmatic." It's a little bit unlikely at the moment, but I'm saying over a period of time, people might become a little bit more pragmatic and PAS might be a bit more useful and you might get to the a more efficient way of remediating things and tick all of the boxes. It's hopefully a long-term upside.
Can I be cheeky and ask one more?
No.
Just incentives. Can you just, I'm just wondering how much of incentives right now, just as, you know, color are coming through, in kind? Carpets, tariff, curtains, and how do you think that might change with your Easter rollout? Is it gonna become more financial contribution towards a deposit, contribution towards cost of living, more impactful in terms of your actual profits?
Yeah. I think at the moment ours is for the first three months of the year, it's driven by mortgage subsidy 'cause that was the big headline. That's what we led with. Sometimes you can have the softer bits, the carpets, the curtains, and some specification items. What we'll probably do, Glynis, through Easter is change our message just to keep it fresh from mortgage subsidy to, you know, deposit contribution going forward. You know, that's as I say, you know, it's the same amount of money. You know, same meat, different gravy sort of thing. You know, it does the same thing.
Thank you. Excuse me. Jonathan Fraser-Andrews, HSBC. three for me, please. First one on the increase in affordable housing, so social customers. Is this a temporary measure to keep the operations busy during this downturn? Is this a permanent shift? Is the first one. The second is on outlets. Could we have some color on how you see these growing into the next financial year from where they are currently? Thirdly, on work in progress going into the new year and into a downturn actually over the course of FY24. Moving parts I imagine are that there'll be less of it with lower completions, but balanced against that will be your ambitions for growth and any in-inflation in the value of the WIP. Just some help on that, how that would help the balance sheet and cash flow. Thank you.
On affordable housing, we're not changing the planning consents that we're trying to get and offering up more affordable housing. We're simply accelerating the social housing, which is already consented. We're not looking to change how we buy land. In that sense, it's a temporary measure to collect cash and to help absorb overheads and to keep your build teams busy. That said, the 25% plus this year, I think will probably increase again in FY24 because private will likely come down because of where the order book is. Then you'll start to see that trend reverse in FY25 would be my guess on it as we enter it now.
On outlet numbers, we started the year with 235. We hope to end this financial year with around 245, we'd hope to add on another 4% or 5% as you go towards the end of FY24. On WIP, you're right. We come into the year with a slightly elevated WIP position, partly because we've had a strong order book, partly because build stages are a little bit more progressed, and partly because you've got a change in building regulations from June of this year. For us to have sites with two sets of building regulations is complicated. It's costly. It's difficult to manage. It requires two sets of design drawings and such like.
We have invested a little bit to get ahead of that, some of the plots will some of the sites will have one standard across the whole site where appropriate to do so. As we go into FY24, WIP is likely to unwind a little bit. Rather than try to predict a figure, because I can't even predict the volume for next year because it's so uncertain. Maybe I would say capital WIP turn is likely to reduce in a slower market. You need more investment in the ground. People like to come and see your product.
A WIP turn of, I don't know, 2.3 in H1 this year, I would expect probably to reduce to under two in the next financial year. That's probably the best sort of guidance I could give you to work with.
Thank you.
Thank you.
Thank you. Rajesh Patki from JP Morgan. Just two questions for me, please. I know you talked about the WIP, but any incremental key moving parts in the cash flow statement for this year that we need to keep in mind? Secondly, in terms of wage inflation levels within the build costs as well as on the admin side, what are you looking at for this year and early into next year? Thank you.
There's nothing really to pick out on the cash flow for this year other than obviously we're commencing the share buyback today. You know, you make your own assumptions in terms of how quickly. I think we said by July for the first GBP 50 million, but hopefully it might be a little bit earlier. I'll not give you a forecast on what wage inflation will be going ahead. We, you know, we need to have those decisions and have those conversations internally. Last year, our wage bill went up by around 7%, so that gives you sort of a feel in terms of the level it was. I'm not convinced that'll be as high going into next year, but there are still pressures there despite reduced volumes. There are still demands for highly skilled people within the sector. We will still feel the pressure there.
Thank you.
Morning. Sam Cullen from Peel Hunt.
Hello.
Just got two, if possible. Jason, you mentioned a couple of the kind of weaker sales areas, southeast, southwest. Are there any sort of commonalities around across those sites that are weaker, or is it just regional, slower in the southwest and you said sort of affordability challenges in the wider southeast? The second one around kind of related to the air source heat pumps you made, and you also made a comment around kind of changing the roof structure to take more PV. Should we read into that whereas air source heat pumps might not be sort of standard product going forward, PV will be a standard product going forward?
Just on the market, I would suggest that the, you know, parts of the Southwest are a little bit weaker, you know, possibly on the South Coast, you know, places like Somerset, Wiltshire when you get out to that space. Whereas the Southeast of England, I wouldn't describe as weaker. I'd just say it's more price sensitive because of your entry point. If you're gonna get someone who can afford a 4% mortgage and pay GBP 500,000 for a three-bed, they're more likely to need, you know, the full incentive in that space. But certainly Southeast I wouldn't suggest is weak, just a little bit more price sensitive.
In terms of PV panels, well, certainly they're part of the changes on the interim rigs are two key points. One is the fabric, and secondly is introducing PV onto the roof. In terms of Future Homes Standard, there's enormous amount of work going on, not only just to work out what type of air source heat pump you have, but where you locate it, how much noise it makes. Do you need PV instead? Can you supplement it? It will be too early for me to say I've got the solutions.
I think that's a little bit of work in progress. I'd love you to come up to Manchester and have a look at what Barratt and ourselves have built up there 'cause it's quite interesting. You can see, you know, what's changing in the industry 'cause it's quite significant. There's a whole like multitude of different specification items. Not all of them we're gonna do, but they're all being tested and trialed and it's quite interesting. I've got Alistair down the front here. Sorry. No, here you go. Do you wanna go last? Go last.
Yeah.
Yeah.
Marcus Cole, UBS. two questions as well. I was just wondering about the sales rate. You mentioned it was 0.75 pre-COVID. I was just wondering what you think that is underlying stripping out, Help to Buy. Just the second one is what do you think the fixed cost is in the business?
I'll do the first and maybe Keith do the second. I did mention to Chris when I mentioned 0.75 that we hadn't always done a rate per outlet. I don't wanna give you figures that are misleading. I can't. We just looked at sales rates and come up with a blended figure to make a comparison to where the market is today. I couldn't tell you what it is when you strip out Help to Buy. Sorry, the bit on Help to Buy, and Keith may embellish this, but the people you've lost in the market is the first time buyers that were dependent upon Help to Buy. First time buyers are still buying if they've got a deposit. Yeah.
We've still got plenty of first time buyers, but there was people that were reliant upon Help to Buy to get a good mortgage rate and a gifted deposit, and they're out the market. You haven't lost 30%. You've lost a small amount of first time buyers that we're not seeing at the moment. Keith.
That's what I was going to say. Help, you know, Help to Buy was about a third of sales back then of total sales, so it helps you frame the math a little bit in terms of sales rates. I mean, it's never precise what's fixed, what's not, but roughly GBP 20 million per month would be our run rate of fixed overheads, and that's across three captions. That's across what I would call site-based overheads, sales-based overheads, and administrative overheads, all add up to around GBP 20 million per month. Don't forget, site-based overheads get charged to a job and ultimately come through the P&L. As you take completions, it doesn't directly go to the P&L. We all have slightly nuanced approaches in terms of how we recover costs.
You're on. This better be good.
I don't know if it's that good, actually. Glynis has got one of my questions.
Uh.
Jason on, sorry, in land, I think you said there'd been 50% of your contracted land deals were that had walk away clauses. Is that is that? Was that lower in the past?
Yeah, Alistair, it's a good question.
That's fair.
It's not typical, Alistair, to have walk away clauses because landowners want certainty. There was a period where the market, everyone had stopped buying land, and there was a few landowners that, you know, still wanted to pursue deals. The risk was too great for us to be unconditional. You know, the compromise was, in some instances, if we felt it was a good location in an area that we wanted to be, that we would contract, pursue the planning application, on the proviso that if we didn't like the look of the market when we get consent in the summer of 2023 or beyond, we could say, "No, thanks." I'm not sure we'd still get away with that today as the sales market's improving. I think that was just an opportunity that we had last autumn, you know, and that will probably disappear.
The second question is based on Glynis' question on the acquisition of the Stratland Land company. There is Two or three subtle changes in the announcement today. It seems to be more Stratland Land in your outlook. There's the share buyback, and also, you're actually doing sales rates per site. Hinting at it at least. Acquisitions, would you I've never really sort of associated Bellway with acquisitions, with M&A. Would you consider that more now than in the past?
Well, my appetite for the business was always to increase the depth of the land bank, 'cause that was certainly sort of a structural weakness, Alistair, going forward if you had long-term growth ambitions. I would suggest, you know, we've had a good spell on land, particularly in that pre-that early pandemic phase where we bought a lot of land at decent prices. We're now sitting on a land bank, you know, 5 and a half years of supply. I don't need to go into the market and buy too much land. A way to, you know, strengthen the business going forward is to have the opportunity to keep working on land and pulling it through that Strat tier.
You know, I'm sure as we get to the end of this calendar year, and we start to burn through some of that land, that we're gonna need to start thinking of, looking back into the market. In that period, we'll be working hard on land. I hope that avoids the question sufficiently.
Specifically on acquisitions of house builders.
Mm.
Would you consider it more than in the past?
I'd probably say less so because of the benefit of the land bank. One of our strengths has always been our operational side. You know, we're good at bloody delivering. You haven't seen me in front of you saying I've missed all my numbers. I've now got the benefit of a decent land bank at good margins. I'd say that's less likely, but, you know, never say never. Never say never.
Just to, just to follow up on the Strategic Land. I mean, maybe it hasn't come across clearly enough, but if you look over the past few years or so, we have embellished our disclosure around Strategic Land. We've been saying for some time we've been trying to build up that Strategic Land investment. I think we mentioned it in October. We had a mini land company which we bought the back end of last year. This one that we bought again this time, these aren't big trading entities. They're asset deals in a corporate wrapper. They're nothing. You know, I don't wanna belittle it, but it's an asset deal really as opposed to buying a big trading operation.
Are we all done? Thank you very much for your time. We're here all morning if anyone needs to chat afterwards. Thank you.
Thanks, everyone.