Taylor Wimpey plc (LON:TW)
London · Delayed Price · Currency is GBP · Price in GBX 76.34
-2.66 (-3.37%)
Apr 29, 2026, 5:14 PM GMT
← View all transcripts
CMD 2018
May 15, 2018
Thank you for joining us. Thank you for coming out to Hampshire. I always get sort of complaints if we drag you out on-site and you don't get a lot out of the day. But hopefully, A, you'll get a lot out of the day and B, it's sunny. So you'll feel pretty comfortable at the end of the day that it was worthwhile.
I'm going to sort of introduce our new strategic direction first of all, and then we're going to hear from Jenny and Chris. And they will both in different ways pick out different elements particularly from the practical delivery side of what we're talking about means within the business and give you a real sense of some specific examples what we're doing already, why we think that what we're talking about is deliverable. And then Lee will when we've made the transition over to the future skills center on this Board and site, we'll give you a bit of a sense of this site, the major developments business and sort of where that's going. And then we'll come back for a kind of Q and A at the end. And I'm conscious at the end of my presentation, I will do a Q and A, but probably quite a lot of the questions that will naturally be picked up by what particularly Chris and Jenny talk about.
So I'll keep that Q and A pretty short and probably kind of constrain it maybe to overall numbers and real elements of key strategic questions rather than the how do you think you're able to do X, Y and Z, if you see what I mean? So I think otherwise we'll end up stealing from a lot of their presentation before we start. And we haven't allowed an enormous amount of time for that Q and A. Glad to say, we'll finish with half an hour at the end that will be Q and A in the whole day, which I will lead and the rest of the team some sort of contribute to. So just for my sort of presentation, I'm just going to give you a quick overview of the team.
Obviously, we've had some significant changes a couple of weeks ago, but I think you know, most of the team just to give you sort of an update on where we are with our sort of senior management team. I have one slide on trading, and I'll cover that now. It's pretty much exactly as we said at the AGM and nothing has changed. So if you want to pick that up in Q and A, feel free. But at the moment, there's really nothing to add.
I would say we've probably seen slightly better trading over the last 2 weeks than we'd seen in the previous 2, but nothing sort of fundamentally different from what we said with the AGM statement. And then obviously, I will spend the bulk of my time talking about strategy, really setting out how we feel the environment we operate in, whether that be land or from a customer point of view or politically, has changed over the last 7 years. Setting out sort of with a couple of key slides in particular, how we see our strategy developing and how that leads us into goals and then talking about it from an investor perspective, talking about the dividend and the capital structure. So first of all, as I say, the team, I think pretty much all of you will have met Chris at some point over the last few years. He's been with the group for quite a lot of years in both finance originally and then in operating roles.
And you have a chance to ask him some questions today. The rest of our group management team is around today and will be available for questions over lunch. Numbers have reduced by 1, simply because we originally had both Ingrid and Chris running different parts of the Southeast business, Ingrid, originally Central London and then Central East London reporting into Chris. Ingrid has now stepped up to replace Chris's overall London and Southeast role, and we don't see the replacement for Ingrid's role stepping onto that team. So it's a slightly tighter team, which I think is healthy, but a team that's been running the business for many years.
As I say, no real change for 2018. And I'd say in a general sense, I'm sure we'll come back to this during the course of the day, our general guidance for the next 18 months for the rest of 2018, 2019 isn't particularly changed by what we're setting out today. We're setting out, as I see it, a long term track for the business over the next 10 years and then some targets for the next five. It's not really about short term performance. And we can happy to talk about 2018 2019, but as I say, we're not expecting to particularly change the sort of financial guidance.
Then moving into the strategy. You all know this, but I think it's important to set the scene. We've been operating to our current strategy since around 2011. We've updated it, and we've internally reviewed it sort of every 18 months to 2 years. But the review was tended to be along the lines of it's broadly working.
The environment is changing, but the changes are not yet sort of clear embedded in. Are we doing everything that we said we were going to do? Does it feel right? Are we missing anything? And although we have tweaked a few things, I would say the underlying strategy hasn't changed in that time.
And the tweaks included an increased focus on customer satisfaction, an increased focus on staff development and investments in both of those areas. It included new financial targets, I think, back in 2014, but in line with the existing strategy rather than really standing back and sort of changing anything fundamentally. And it included in 2 stages significant step ups in the dividend. But again, those step ups in the dividend were very much in line with what we set out in 2011. And for me, I don't think I've been in a business before that's operated in a strange same strategy for as long as 7 years.
I think there is a sense that I have that actually, having operated that strategy, we've kind of finished it, And there's always that slight sense of traveling and arriving. We've been looking at what we're going to talk to you about today for in real depth for a good 18 months trying to work out how we see the environment. I think with the uncertainty that Brexit created, that probably pushed that time line out a bit. But I think where we sit today, we think we can look at the long term environment and have a lot more confidence, and in some ways, the medium term environment as well, and we'll come back to that. But it is the time for a more in-depth review.
It has the environment has changed, particularly around land and a little to a certain extent in other ways. And we do think and we'll come back again to this as a flavor that it's important to test, challenge and push ourselves. Yes, there is more that we can do. And I don't just mean from a volume point of view. Chris will talk about sort of the cost and efficiency review that we're planning to do.
We think that we need to sort of keep testing ourselves and pushing ourselves in the business. Otherwise, things get a bit too easy. And if you don't keep moving forward, you tend to either go backwards or fall off. So coming on to the environment. And a good chunk of my presentation sets the scene about how we see the environment, how it's changed.
Yes, sort of first of all, looking at the housing market and customer drivers, but then look at land planning and the industry structure, some of the engine room limitations around the business, people, production, resources, capacity constraints and then finishing up with a little bit about Taylor Wimpey and where we see ourselves in that environment and how the business has changed over the last few years. Quite a lot, particularly on the land side. Jennie or Chris will pick up. Jennie will go into the land environment and how we see the planning system in more detail. So I will skim through that.
It's on the slides, but I don't want to steal Jenny's thunder. But looking at the housing market, so some basic things. The macro drivers haven't changed very much over 20 years. We still think there is a very strong case for strong underlying demand, new household formation, an awful lot of untapped demand with people who can't get on the housing ladder who would like to or people who can't move up the housing ladder or don't have the confidence to or who would like to. Supply running consistently below that level of demand.
And yes, we don't see an environment, despite what we're saying on land, where those two drivers are likely to change materially over the next 10 or 15 years. Occasionally people say, are you worried that suddenly there'll be a plot of land that hits the market and suddenly housing production will go up, that there'll be a raft of small house builders. It's not that we're trying to stop those things happening. We just don't see there's any practical way because of the constraints that we'll talk about that suddenly it's going to change over the course of the next 10 years. But it does leave you with the key balancing factor, particularly in house prices and to a certain extent with housing volume sales, both newbuild and secondhand, comes back to mortgage availability and the cost that our customers and secondhand customers have to pay.
Those in the sort of short to medium term still are and probably, yes, will always remain the main drivers of value in the short term. But there are some things that have fundamentally changed. That financing market and therefore our newbuild sales market is very different. Stating the obvious, very low interest rates, the impact of Help to Buy, a very slow and concerning secondhand market. Increased rental choices, I sort of debated the wording of that a little.
Is it increased choices? Is it just the increased need for people to make a choice to rent? But there is slowly growing a more recognizable and identifiable professional private rent, etcetera. And we think over the next 20 years with sort of the kind of constraints on finance sort of financing available for buyers that, that rental market will continue to grow as a proportion of overall housing. But also, sort of tight mortgage controls, I flippantly said they did say it will be different this time.
I'm absolutely not saying that we are not a cyclical market. There will be a housing crash. Nobody should take anything I say today as to me, anything other than sooner or later this market will go backwards. It's the nature of housing. But things like the mortgage market review have meant that this cycle has been more muted in its growth, that we've hit a pit yellow phase, which has gone on for some years now, where house price growth isn't running too far off inflation.
We had a relatively small short sort of recovery uptick in prices in 2013 to 2015, and then we've kind of settled into a much steadier pattern. That's a pattern that we would much rather see. It doesn't remove risk completely, but it certainly makes a much a significant predictions. But as I say, that balance on the supply demand is unlikely to move. Whilst we see issues like Brexit and its impact on the general economy as impacting quarter on quarter performance, we don't think that the next kind of 3 years are going to be absolutely smooth sailing with positive price growth in every quarter.
We don't believe that it's particularly likely that they will trigger a major decline in house prices or a major reduction from where we see sales volumes today. And the key driver over that sort of medium time will remain interest rates and mortgage availability and how that balances with wage growth. And so if we look at it from a land investment point of view, that quarter on quarter movement doesn't and shouldn't worry us too much. What it does is where do interest rates go and when in a much more material way and how does that balance it with the overall strength of the economy. But it does leave house builders in an unusually positive position, and that's the backdrop to this strategy.
And sometimes we forget it, and I think sometimes the market forgets it. We operate in a stable, in most senses, developed economy, but there is far greater demand for our product than there is supply. And that's incredibly unusual. And I think perhaps we underestimate its impact and its potential value. If I then talk about customer drivers, and I'm then talking about customers as individuals rather than as we tend to talk and think about it as the market as a whole.
Again, many of the drivers haven't fundamentally changed. Location is still probably the single biggest factor. Price, particularly related to affordability and how much is my 1st month's mortgage going to cost me. And it is as simple as how much is my month's mortgage going to cost me when I buy this house. It's such a major driver.
And then that sense of confidence, not I don't think and it's very different to when I sort of first came into this business back in the sort of early 2000s. You've got this real sense of people buying a house for growth and kind of working out that sort of how much the house was going to be if prices went 5% or 10%. That's not been a factor of this market over the course of the last 5 or 6 years. That sense of it's only going to go one way isn't there. People just need confidence.
And I'm talking about our owner occupier customers, the vast majority of the business. People just need confidence that it's not going to go backwards and that they're going to feel that they made a sensible investment. And actually, there are drivers for buying a house, and then does it work for me? Is it where I want to bring my kids up? And is it the right place for my family?
But there are some changing trends. And they're not as big as those big drivers. And sort of housing doesn't tend to move rapidly, but it does move. Different lifestyle expectations, there is a stronger desire for more flexibility. Most of that increase in rental product is needs driven, but some of it is flexibility driven and desire driven.
And a real acceptance of I'm probably going to need to rent for longer. More of a need for connectivity and convenience, one of the things and we'll talk about sort of a sense of business that is more customer centric going forward. One of the things we missed and the entire industry missed was the extent to which broadband sort of access went from being something that people wanted to something they saw as slightly more important than electricity, running water and occasionally air. And we weren't geared up for that, and so we're reacting. That's the kind of small thing.
I mean, when I say we are reactive, it's not proactive. In that sense, it has also affected the geography that sort of we can operate in. Our businesses in East Anglia and down into the Southwest are far stronger because than they would have been 10, 15 years ago. Those we see as real long term sustainable growth areas because of the changing ways that people live. And so there are some real underlying demographic shifts and other changes that have an impact, but not overnight.
We think if you look forward, there are changing views of the car. I think if you look at, yes, particularly in urban and suburban areas, yes, people in their 20s don't have the same expectation that most of us in the room had at the same age, that having a car was an absolute rite of passage and that you wouldn't dream of living without 1 and probably at least 1 per adult in the family. That change actually changes massively choice of site, how you allocate space. I think planners are a long way from catching up with that. So we can't sort of immediately tweak and make those changes, but it is a change in trend.
And I think there's a I've described it as a growing re understanding. I think there is a real sense from sort of our younger buyers of the need for community that's quite different to where it was even 5 or 10 years ago. But there is a sense of real frustration with our industry as a whole that actually we haven't moved with how they've seen other retailers. And we are a retailer from a customer's point of view, other retailers move. Yes, the most classic way is the way that we communicate the extent to which we're able to provide them with good up to date information.
And actually, a degree of how transparent we are around. We often are accidentally sort of opaque in the way that we manage the relationship with customers, and particularly that lack of empathy, because buying a house is a scary process. People are scared of making the wrong decision. It's the biggest decision they take. And particularly, most of our buyers are reasonably young and often taking the decision for the first time.
Actually, we're not good enough at really identifying how that is impacting on them. So as I say, on the land and planning piece, I will skip through fairly quickly because Jenny will cover it in a lot more detail. But the land environment, our key conclusion is it has changed. And that shouldn't surprise anybody in the room because everybody in the industry has been telling you for a number of years how much easier the land environment is, how much better the returns are, how much less competition there is. Somehow none of us then make the next step to say, well, what does that mean about the business apart from the short term?
We'll buy a bit more land then. And then in a sense, I see what we're saying today and that the two things I want to take from this slide on land are we think we have to conclude now there is enough evidence that it is far more likely that the land environment will remain as it is today and perhaps get a bit better and that it won't be the fundamental constraint on the industry going forward for at least the next 5 to 10 years. Who knows beyond that? But that's more likely than that it will revert to where we were in 2,005 and 2006. And we have to start to base our business decisions on that.
And that means a few things. It means higher returns. It means less cash locked up in land, and you've seen the benefits of that. But it also means that other constraints become more important, and that we have to think more carefully about those other constraints. I think sort of where we've looked at it over the last sort of year or so, we've been quite reticent about accepting that maybe it's changed sort of for the longer term.
We've tended to have a view, well, it's changed, but we don't really trust that. But I think everything we test and to a certain extent, I wouldn't say about this about most areas, I think that sort of positive drive in the planning system is sort of one of the things that would still be positive under a Jeremy Corbyn led Labour Government. I don't think it would particularly I don't think it's particularly party political. Overall, the industry impact is positive. Yes, all the financial returns, more choices, I think yes, but it brings some challenges.
And as say, most of those challenges are about the other bottlenecks that it exposes in the industry on the delivery side, which we'll spend some time talking about. So some of those sort of limitations, because you can see it already, you can see it particularly for the smaller companies in the industry, but you can see it for those companies that are growing quickly. Production resources, and I mean sort of subcontract labor on-site, I mean materials, I mean site management skills, technical skills, just the sheer process of managing quality through that volume growth. You've seen those challenges. And I think if anybody in our industry stands up in front of you and says that they've managed that and they haven't seen any of those impacts, they're not telling you the truth.
Everybody's seen those challenges. Some have managed them better than others. Some have taken them proactively and said, we can't let that happen, but everybody's seen those challenges. I believe, and we've really sort of spent a lot of time talking about this and testing it, that over time we can manage all of those constraints. But I don't believe there's any silver bullet.
I think sometimes people would have you believe, and you see it with sort of people coming into the industry from the outside that there is a particular modern method of construction. I hate the phrase, but there is a sort of a different way of building generally in a factory that will suddenly solve all those problems. It's just not true. Our Project 2020 went through every single methodology that's out there. And you if you've been around the industry a while, you'll have seen a number of different external bodies come in and say, we can do this better, we can do this differently, and none of them survive.
And there's a whole mix of reasons, which I'm not going to go into. We can change, which we'll come on to and Jenny will spend some time on. We can change the way we build. But there isn't one, sort of, attastrate the prisoner is free. I think I would put vertical integration in the same bucket, sort of and you know what I'm talking about here.
We can improve our process. We wouldn't rule out going into one element if we saw a real bottleneck. But it's not going to suddenly change, the overall production limitations on-site. There is no one bottleneck that is so material that solve that and everything else is okay. We've got to plug away at a whole series of different things.
And in a similar way, I think people will sometimes have you believe I can change all my house types and sort of take out lots of cost by de specking. I've been through that cycle a number of times. And it's the right thing to do, but it's not a game changer. None of those things I'm not saying that any of these things aren't things we should look at, but none of them suddenly change sort of. And to a certain extent, we are guilty of looking for a short term answer that suddenly solves all those constraints as a lower cost and suddenly everything's easy.
It ain't there. So actually what we're mapping out for you in a way and starting to talk about today, and we'll talk about more, is a series program of a number of stronger supply chain links, more direct labor. We're running 3 of our businesses with direct labor pilots at the moment. Real choices around production methods. So we wouldn't rule out, for instance, more timber frame and various other production methods, but not thinking that something suddenly is going to replace traditional production.
Better and more skills training. Yes, and when we talk about margin, it's one of the things we want to invest in. And one of the things we've allowed for in our view of margin is the need to invest more in skills training, much better use of information. And Jenny and Chris will both talk a little bit about our approach to sites and particularly around factories and outlets and how we actually really approach sites. And in fact, because we're using a slightly different language, I'll touch on it here.
We'll talk a bit today and we'll talk over the course of the next few sort of results announcements, I think, about trying to break down this concept that you've got outlets and you've got sales rates and the sales rate is dependent on the market and the outlet is dependent on the planning system and there's not really a lot you can do about them and you multiply the 2 together and you get volume. It is nothing like that simple in the real world. And what we're trying to do is give you enough of a sight of the range of different site sizes and how we think it's right to operate them, some examples of what we're doing at the moment and what we'd like to be doing in the future. And to do that, we're just introducing some but it's a single But it's a single piece of land. And often people blur those by using multiple brands, multiple outlets, and it doesn't give you a clear picture of what the choices of the business has.
An outlet is a sales unit. Yes, that's not changing that definition. That's sort of more or less the definition the industry uses. We tend to have less double headed outlets. We think that's right, but it's always an arguable subjective thing.
There are times we have more than one outlet on the site, but not often. And a factory is a build team. And this is one where we probably see the most need to explain and sort of see the limitations. We can productively run more than 1 build team on a site, but each build team has got a range of potential capacities. And so actually, we can flex our production capacity over time significantly more than I think people have tended to see.
So we'll talk a bit about those concepts today, but we'll use them over the few years, I think. We can change the balance over time, and particularly on large sites. So I'm not going to talk you through the numbers and the metrics, but we'll talk about them during the course of the day. But as you see in the sort of the bottom bullet point, if we want to grow the volume in the business and particularly if we want to shorten the land bank by growing the production on large sites, there's a lot of different bottlenecks we need to work through. We think if we're smart about it, we can work through all of those bottlenecks.
But those are the things those are the execution factors that we need to get right. So just finishing the sort of environmental backdrop, if you like, Taylor Wimpey and how we see some Back.
Back.
We still have and they are still and I no way want to imply that land is not a massively important factor in our business. We have a land bank with a potential £47,000,000,000 worth of revenue on it. And the returns in that land bank are at broadly the same levels as the returns that we're delivering at the moment. High operating margins, returns on capital into the 30s, that gives an awful lot of visibility about where the business can go. A very strong balance sheet, and you can call this good or bad, but a generally cautious approach.
And I would say still say MAPFTA today, our approach is still naturally a fairly cautious one. A very strong network and a very stable network of 24 regional businesses, and we think in the right place. We won't spend a lot of time on it, but nothing we're saying today is kind of saying we're going to launch lots of new business units. We've been through the cycle of splitting business units. And what you end up with is one decent one and one terrible one that then a really poor performer for years.
There are times to spread into new geographies. But when your coverage is right, then we think it's a relatively easy on paper, hard to execute in practice way of driving growth. Very capable, motivated, stable team. And I don't sort of just mean the senior team, I mean throughout the business. And very strong consistent process.
Sometimes we wonder whether too strong and too consistent, yes, whether actually we're too driven to kind of get consistency across the business. But a real belief in the business that the way that we want to do things is the right way. The leasehold issue last year was very painful for us because it kind of threatened that core piece of who we were. But I think the way that we dealt with it, people in the business have then responded well to and said, no, that's who Taylor Wimpey is. And I do think it makes a major difference when you are in conversations with central government, with local authorities, in planning, with land partners.
We are trusted. We accept we sometimes get it wrong, but we are trusted and it makes a difference. And already before we sort of map out today, highly motivated industry. But and this is me acknowledging we are perhaps a bit too safe, a bit too staid, a bit too maybe institutionalized sometimes, and creating a higher degree of entrepreneurialism within some of our businesses is an important thing for us going forward. We need to test and challenge them then give them a bit more space and freedom to move.
Just some financial numbers. I've done something similar before, and I was going to pick out 2 or 3. So we put slightly different numbers up on the slide just to illustrate some points. I'm not going to talk particularly about the financial movements between 2,006, 2011, 2017. You kind of know that story.
But clearly, land costs fallen from 25.5% to under 20% on new acquisitions. Actually, if you looked at the land bank proportion, the fall is far more significant than that because you'd seen such a big ramp up in 2,006, which you just haven't seen. That sort of 18% to 20% range that we've looked at has been very stable over the course of the last few years. Strategic pipeline sort of back in 2006 was about 45,000 plots. Today a sort of new record of 117,000.
And we are continuing to add to it more quickly than we are taking away from it. And we expect it is likely to grow over the course of the next few years rather than shrink. But I'll pick out the bottom 2, customer service scores that we felt were okay at 88% in 2006, and then we were really pleased in 2011. But Chris will talk about this particularly, Just when we look back, didn't have the substance that we wanted in 2011. And so reduced in the meantime to mid-80s, and then we've ground our way back up to 89, just touching 90 over the last few months.
But if you look at the number of people that it's taken to do that, it's very significant. And actually, if you look back over the last 15 years, you'd have seen about 100 people in customer service for 15 years and then are suddenly realizing reactively there was a gap and there's a problem. I don't think that in 5 years' time those 400 people that we have today are going to be doing anything like what they're doing at the moment. Already, they're moving from reactive management into more proactive management, and that trend will continue. I don't necessarily think we will lose the roles.
There's a number of roles, but they have the capacity to do far more in terms of community development and customer liaison than they are doing in their reactive way at the moment. And that in some ways, it's uncomfortable to show you that shift. But at the same time, I think we can take that and turn it into a real advantage. So last bit of sort of look back, that was the underlying principal slide that we set out in 2011. And I just thought I would look at which bits of those have changed.
We're not going to use the slide again after this. But there are only 2 that I wanted to change. We said their active management of land portfolio is the key driver of value creation. I'm only making one change. It's a key driver.
It used to be the be all and end all of the business. It's now one of the major factors that we have to take into account. And the flip side of that, the efficient engine room to protect and enhance value through the business was important. If I updated that, it now gets 2 ticks. It's now far more important than it was.
And it's probably the biggest limiting factor. It's probably a bigger limiting factor today than land. Not sure that will always be the case, but definitely that balance has a We'll talk about the numbers afterwards, but this is the key direction. Our continuing focus on customer satisfaction, but I think our engagement with the customers over the last 2 or 3 years has really given us a sense there is more we can do and should do. Part of that's risk management.
Part of it's because we believe it's the right thing to do. Part of it's because we think there is huge opportunity long term to be the best house builder and understanding our customers and delivering products they want. Part of it is about large sites. If we're driven and limited by absorption rates on large sites, then having better products and better understanding of the customers' kit clearly has real value. It's a mix of all of those.
We see this as a bigger change than I think you'll see in the share price today. I get that's more about dividends and financial targets. We see this as being a fundamental shift, and that's why I would describe it as revolutionary rather than evolutionary. The other element is perhaps more evolutionary. We want to use the increased opportunity in the land market to work our land harder, yes, not to sit back and let it deliver sort of a steady stable sort of level of growth, but to drive growth, but to do it in the right way.
But nothing has changed about our desire to invest in more land when the time and opportunity is not right, not all the time. We're not looking to suddenly aggressively grow the land bank. I don't think we could get the engine room to deliver both the efficiency out of our current size of landbank and further landbank growth on that right. So it would be a high risk approach anyway. And we are certainly not returning to any kind of feed the machine mentality.
And whilst I'm very happy to talk about volumes and where we see they might go, what we see the capacity might go, what I am not going to do and why it's not in the statement is give you a volume target for a given year, because that's what gets you on to that feed the machine mentality of, I've said I'm going to do that, therefore I have to buy this site even if it's not the right site, therefore I have to build that house even if I haven't got the resources to do it properly. So that's why we will not give you a volume target, but we will talk very openly about what we think we can do in different conditions. Develop best in class engine room processes and really look at the way that the barriers that the whole industry is used to us, things that it's our job to knock down rather than something that is immovable and we can't change because it's just a fact of life. We can change pretty much everything about the engine room side of the business if we have long enough to do it. Statically quickly cautious, and I'll touch on this in a little bit more detail.
Probably the one change there is if we understand our customers better than anybody else, we think that gives us an additional strength. That goes over and above our view of location quality being a good defensive strength. I think there is more to it than that. And then thinking about the overall market, actually to have some kind of ownership of the affordability for our customers. I don't mean we reduce our prices so anybody can afford to buy a house.
I just mean really thinking about if Help to Buy were to change, for instance, not just what does it mean for us as a business, but what does it mean to individual customers and how do we change the way that we sell and the sites that we operate and the products that we use to maximize the chance that people can still afford to buy or access through a sort of PRS vehicle, our product. There's a lot we want to do, and I won't spend a lot on it today, looking at how the business connects in with communities and really setting out a firm social purpose. It's something that actually has driven the people in the business a lot over the last 3 years. And we'll touch on it sort of in the breaks if people want to talk about it. We are committed to more investment in skills, supply chain development, research and development over the next few years.
And it's a balancing act with the margin. It's captured in our overall margin guidance, but it's a balancing act. It's about investing for the longer term, but making sure that we do that in a way that we drive some of that from efficiency in the existing overhead structure. And particularly around skills for employees, we've seen the ability to retain our staff in this environment has been incredibly valuable and making sure we get that right, But giving, as I said earlier, a bit more sense of agility, innovation, entrepreneurship in our business is important. I guess the last piece, which Chris will talk about, we don't think we're as efficient as we can be.
We think we can get more out of current trading. I think you always can. So sort of it's not our biggest driver, but it's definitely something that we're focused on. And we'll continue to update you over that on that over the course of the next couple of years. But you shouldn't see that it's all about the long term.
We do have to drive the best possible short term performance as long as we're not compromising the long term. So setting out what that means in numerical terms, we'll measure customer service performance based on the things you already understand like the 5 star survey, but we'll start to talk more about the 9 month survey, which we think is a better, deeper, longer term measure. And also look at sales and pricing relative to the market to judge whether we're getting sites, products, communities right, but not just when we're on-site, but also when we've left. And look at, yes, how the communities that we build are developing and interacting. On the financial side, our operating margin guidance is 21% to 22%, and that's really for the foreseeable future.
In the current environment, we think that's about right. We will be driving to try and get it up to 22%, 23%. We wouldn't rule that out. But I can't guide you to those numbers until I see sort of the path to it. Sort of we believe we can make the investments we think are right within that sort of level of guidance.
So that's why we've arrived at those numbers. We can push forward the return on capital, particularly the shortening of the land bank naturally drives that, and we think there is more efficiency to get at. We also think we can drive forward our work in progress efficiency on-site. In getting our customer service right, we've let our build times go out further than we think is necessary. And gradually, we'll be trying to pull those back over the next couple of years.
And making sure that we remain a cash generative business, we're prepared to invest in the land bank up to a point, but you should see 70% to 100% as an annual range. The average should be at least the midpoint of those that range probably higher. But because of the volatility of cash generation as an annual measure, we've had to go with quite a broad range. But if you went with €85,000,000 to €90,000,000 as an annual as sort of an overall average over the time that wouldn't be a bad guess. That land bank efficiency, which is a lot of what we'll talk about through the rest of the day, is the biggest driver of both the enhanced dividend that we'll talk about, but also sort of the changes to the return on capital.
We think we can run our big sites harder and really make that work. We think it's the right thing to do. Our sense of scale at the land bank hasn't massively changed. So as we look at the next 3, 4 years in the environment that we expect, we expect that to come from volume growth by definition. And you can work out from what we've said as land bank years 4 to 4.5 years and what we said is the range of sort of land bank sizes, roughly where we think the business will get to in volume terms over that time.
And it's deliberate to give you a range, because it will depend on the investment conditions and the sort of sales market conditions. But it gives you a sense. Do we think 18,000, 19,000 plots is reasonable over that time? Yes. Do we think 20,000 plots is a reasonable view of the capacity of the business in its current form?
Yes. Doesn't mean that that is the furthest it could ever go, but we'd have to make some other more fundamental changes to move beyond that. So it gives you a sense of what can be done, which is what we're trying to do. And then last of all, just a sort of more kind of an update point. We still see strategic land as very important.
We couldn't be doing what we're talking about doing if we didn't have the confidence in our land supply from strategic land, the scale of the sites and the financial returns. And I think it remains both a margin differentiator and a return on capital differentiator. And as you can see from the comments sort of on London and Southeast and Jenny will talk about, we'll continue to improve and invest and develop those teams and those assets. We're not just standing still on that. I think I've probably covered most of the points on completion growth.
But we've always said we won't give you sort of an outlet number. And I kind of felt here actually I wanted to kind of look at it slightly differently. And Jenny will talk a lot about where we think outlets go. We're not saying that outlets don't matter. We're just saying, yes, we need to break down that relationship a little.
So you'll see, and it's why I'm comfortable to give you more of a sense than I've tended to over the last few years. You'll see as we go through the presentation on sort of sites and on factories why we don't see it as the dominant factor. If you accept it's not the dominant factor, I'm more happy to give you a bit of guidance on it. It's that I don't like that sense of you can kind of take that number and you can't control that and you take that number, you can't control that, and then that's the answer because it ain't like that in the real world. And as I've already touched on, there are definitely parts around improved efficiency that we can continue to deliver.
And I'll cover this fairly quickly, but it is really important to us. And I probably did it at the beginning. I'm just going to give you two examples. There's a few more on there. What does turning the business around?
So it starts from customers and what customers need and aspire to as being the driver as decision actually mean. I'll give you a couple of very simple examples. The first one is garages. Yes, my favorite statistic when I came into the industry was 8 out of 10 people in the U. K.
Insist on having a dining room when they buy a house and 8 out of 10 people in the U. K. Never use their dining room as a dining room. That's moved on actually. Our customers would never or almost never walk in and have a dining room on their list of things that they want.
It shows that sort of trends in housing do move on. They just move on slowly. But today, it's true of garages. Yes, we all know nobody puts their car in a garage, but we'd still build a garage on thousands of houses that's designed for a purpose that our customers don't use it for and isn't designed for the purpose they do use it for. So it's not double skinned, so it's not watertight.
It has a door that's completely impractical if you want to turn it into a utility room or a gym or whatever people actually use it for. And so actually just turning it around and saying, how do we persuade planners that we actually want to deliver the same space for the purpose that our customers want to use it for? It's just a simple, very practical, small example. And the other one I'll pick out is around pricing transparency and process communication. As an industry, we are shockingly bad.
It's like sort of being in the sort of secondhand car dealership sometimes, that sense of I've got my release list price. Just really thinking through how do we make what actually doesn't need to be an opaque process much more transparent, because in a world where actually customers are nervous about buying a house, we're making that process worse for them rather than easier. And if we can be the easiest company in the industry to do business with, I think that is a good long term advantage. Two examples. Chris will talk about some more.
And then this I put in because we spent quite a lot of time talking about in the lead up to today, the private rented sector. And I see that as one example of a widening our reach to market. If we believe there's a lot of long term demand and you take a 15 to 20 year view of our industry, I think that's sort of an obvious statement. But the challenge is people having the capital capacity to buy our product, then having a view of the private rented sector has got to be the right thing for us to do. We have stopped short of saying it is right for us to invest in a material way into the private rented sector.
There's a number of reasons for that. The obvious things about sort of the returns on that capital and how we get the valuation of that right in the business, but also really having the confidence that we're the right people today to run that kind of portfolio in that sort of scale, which I don't think we have. But what we are committed to do, and it's why we've sort of put a placeholder in the statement on capital, which is not huge, but is enough for us to do a number of pilot schemes, some of them as joint ventures, and Lee will touch on one later on today. But yes, we have others. Some of them which we might do on a stand alone basis, which will sometimes involve as building and holding consciously private rented product, but really to test to make sure that we know how to operate effectively, how to maximize value, how to provide a good quality product, and actually be able to move as that market changes, because our long term view remains that that is a fundamental sort of growth area in terms of demand for our product.
And the other thing I'll pick out there are and actually sort of not so much one example, but really thinking about in a world where our customers are constrained by affordability, how we make sure there is many different routes. If we don't have Help to Buy in 10 years' time, one thing I've always been clear on is Help to Buy won't suddenly disappear at the beginning of 2021. It will either happen before that or long after that, but it will never happen on the date that it's supposed to happen. That's the way these things work. But we do have to kind of look forward and say there will be a time when it's not there.
How do we maximize the ways in which customers can buy our product? And how do we kind of share that and own it? And again, Chris will touch on one particular example. On cyclical management, really what I'm flagging is we don't see a major change. Touched on it already, but very much driven by a cautious balance sheet, high margins, not overstretching land investment, making sure that we get the right quality of sites rather than the best sites that we can buy at the time.
And one thing I've just added on the bottom, which we'll perhaps talk about in a later presentation, but just the principle of if the world changes being able to turn the business cash positive within a defined period of time. That's why we're reticent about large numbers of land creditors. It's really just thinking through if the world changes how quickly can we become cash positive. And then on dividends, we haven't changed the structure. We've changed the amount.
Maybe you will have picked that out. We thought about this long and hard. We think the dividend we've got is still right. We would have been prepared to change it if we felt that the new strategy required a new policy, but we don't think it does. But two things have changed from the point where we set our ordinary dividend level.
First of all, performance since then has been better. We have today more cash and more cash generation than we expected to when we set the ordinary dividend at €150,000,000 And second, if you look at what we're talking about in terms of land investment, land efficiency and our view of the market going forward, we have more confidence that we can continue to drive out, even in a weaker set of market conditions, a much higher level of underlying cash flow. And that's why we think it's right to increase the ordinary dividend rather than the special because we see it as a long term shift rather than just more cash on the balance sheet today. But our guidance is sort of the level and it really hasn't changed that the level we set today, we set with this high degree of confidence that we can get that it's a level that we can sustain and hopefully grow from that. One word I think we may have got slightly wrong and I've just seen in a couple of notes is people have taken the flag that we expect dividends, yes, special dividends to remain comparable to the levels in 2018.
We probably should have put at least comparable. That doesn't mean that it's definitely going to grow, but we are not trying to signal to you that that's a cap, if you see what I mean. The way that the ordinary dividend works, because it's based on asset value, there is more natural growth in that anyway, which will obviously offset the balance over time between the special and the ordinary dividend. So we see the long term direction as being very much focused on customer needs and aspirations, but delivered in a commercially sound way. We have strong strategic land assets and skills we want to build on them, but also work hard in short term land and make that land work harder for us.
We want to invest in the capacity of the business. I think over time you can do almost anything with the build capacity of the business. I think people's sort of constraints are to a certain extent self imposed and to a certain extent because they only look at what they can do in the next 18 months. High margins continue to remain important in that 21%, 22% level. Our primary goal is sustaining that sort of level.
We will always continue to drive a bit more if it's available. It's basically cautious with a strong balance sheet and sort of cash returns and dividend policy as part of that, but actually creates something that's got real value over and above the history of the sector because it is better and more professional at dealing with its customers and its people and is more robust. We live in a world where there are political risks, where there are environmental sort of risks. And actually, the sorts of things we're talking about, I think, are not just a better business, but a much stronger and lower risk business as well. I'm in for time.
Actually better than I thought. So sort of probably 10 minutes for questions. I'll say, if we can keep questions to sort of areas of principle, perhaps if there are we're happy to take questions on numerical guidance as well. Don't want to get too much into the very short term. But in terms of the detailed delivery piece, if we leave that and I'll give Chris and Jenny the chance to do their presentations and then we'll share questions at the end of those.
Glynis?
I'll start again. Just in terms of your margin target, because you're talking about retaining margins approximately where they are, but customer service costs money. You are talking about some cost savings and looking at range and all those things that go with it. But within your guidance, are you assuming any house price inflation or build cost inflation? And what is in your current margin in terms of the capture between those two elements?
So we are assuming and yes, in terms of the way we've arrived at those targets, the same way we always would that we're assuming either current costs and current sort of selling prices or that the 2 offset each other. And the environment we continue to see at the moment in which I don't see any kind of logical reason to change the view that we're getting selling price inflation in the 1.5% to 2% range. We're getting build costs in place over the 3% to 4%. And those more or less offset each other. And that's inherent in those targets.
So we're certainly not building in any future sales price upside. I would like to believe, and I think we have to believe, but I just don't have the data to be able to put it into the targets. But if you get the customer piece right, then over time, is a premium in that. But I think it's a dangerous road to go down as driving your decisions, if you see what I mean.
Current margin has no benefits of house price inflation for build cost inflation, I. E, the starting points?
No. I think that's there are so many. And we've set out each year the sort of mix effect. And clearly, over the last 2 to 3 years, those have started to plateau. So I think it'd be wrong to say that there is none.
But you've also got higher margin land that's been bought and is coming through, which offsets that. You put that all together, and I don't think you've got a particularly meaningful movement either way. If we turn around and said, actually, we don't really care about what's going to happen in 5 years' time. We don't really want to do anything differently. We don't really want to invest in production skills.
I'm going to do exactly what we're doing with customers today. Then you could probably argue you could drive 1% out the margin that you kind of think, yes, I must be able to get at that cost wise. That's probably what we see as being the offset. I'm not sure starting here today. I'd still feel the confidence to say that's our guidance even in that environment, but that's kind of the rough sense.
So there are meaningful movements, but it's not a dramatic shift, if you see what I mean. Well? Go ahead, Sten. We'll just move forward. John Bell from Barclays.
Just one actually. Letwin's initial findings focused on absorption rates and multi outletting. You've told us that you've got fewer double headed sites than others. I just wonder how much of a consideration that is? How much of a consideration letwin is or how much of a consideration the double heading size is?
I think on that you'll get some you get a bit more of a sense sort of particularly as Chris talks about that part of it, because you talk about sales rates on different sites and with different numbers of outlets. I think it's easy to mix up double heading sites with double branding. We felt for a while that actually having a second brand only has logic if it's doing something different. And so we wouldn't rule out at some point in the next 10 years having a second brand if we were clear this is the part of the market that it's trying to serve. The product is different and it's worthwhile.
We've not seen that over the last 10 years and we're not seeing it right now. We have some instances on large sites where we double head, but they are almost exclusively where we've got a separate access and very differentiated product, because we think when you go back over time, it confuses customers. It actually sometimes confuses the business where you've got 2 local businesses competing with each other with different sales presence. Now it's a view, and we'll tweak it a bit as we go forward. But we think it's more about and this wouldn't really, yes, being consistent with Letwin's conclusions.
We think it's more about having a wider product range, better, clearer ways in which you're communicating with customers and accessing them than is about the number of sales outlets per se. And it's why I kind of want to try and delink that outlook piece a little bit because I think we're guilty of it as an industry, but it's too simplistic and it's not you actually then miss what you really should be focusing on because it's easy to stick another outlet on. You don't have to plan it in advance. You kind of takes a few months and it's sort of it's there and suddenly everybody feels more comfortable. But it's a false comfort because it doesn't get under the underlying sense of why are customers coming to the site, what are they actually looking for and have you got the product to satisfy them.
Do you want to move it forward to Will? Thanks.
Thanks. We'll jump in.
We'll jump in to your area then, Kristen.
Sorry, just
a couple. Yes, the first one, just let me think about the dividend guidance. And can you just update us
as to your latest thinking on appropriate capital structure, be it
net cash, average cash,
young creditors and whether that's changed post Chris' arrival as FD? And second, just thinking around the land bank length, the new 4, 4.5 years. I think 5.25%
was the previous number.
Has your thoughts changed on how the split should be within the owned and
controlled portion of that? Yes. I think the capital structure question, if you don't mind, I'll leave to after Chris' presentation because I know he'll touch on it and then sort of perhaps re ask the question there. In terms of and we've thought long and hard about this because inevitably when you're trying to come up with sort of market guidance, you're trying to come up with something that's reasonably straightforward and not overcomplicate it. And the balance between own and control makes a huge difference.
And we don't know whether actually we should guide based on owned land only, because there's no logical reason why we wouldn't want the controlled land to be sort of a bit like strategic land, almost be as big as it possibly can be. But we think overall it's more stable and that gives a better kind of guidance. I wouldn't rule out that we will end up with more controlled land because of the number of sites we've got coming through strategic land over the course of the next sort of few years. And that might push up the sort of absolute land bank size. But if it does, it doesn't change the cash metrics.
And that's why we've gone with it as a guidance because we think the thing that investors care about it doesn't affect. So it's then sort of the land that we control, but haven't kind of paid for that is more flexible. So the 80,000 might go up a bit simply because we have 2 or 3 really big sites that come through and sit in that number and that shifts. But it doesn't change the cash dynamics and working inside harder that we've talked about.
It's probably hard to think that the owned land bank could be anything less than say 3.5 years or something?
Yes, yes. No, no, no, definitely, yes. Should we just move back over to this side and work backwards through the room?
Chris Fremantle from Morgan Stanley. Just want to follow-up on the question about the Letwin review. It feels just reading I mean, just listening to what you sort of haven't said and the amount that you haven't said about that, but you don't really think that, that is going to change the dynamics of returns and the remedies that they that is imposed by a government that's under a lot of political pressure to fix this is not really going to change the dynamics for you. Is that a correct reading of the fact that you haven't really talked about it?
I think it's probably true. But in a sense, the way we see all we can do is run the business in the right way in the environment that we see. I don't think that the way we see that review going is going to fundamentally change things. And the way in which it is changing them or in which it might, everything we're talking about will make us better prepared to respond to anyway. So it doesn't change the conclusion, if you see what I mean.
Now you always worry with any political based review that there's a left hand kind of left field, sorry, left field response that you haven't seen coming. We can't see it at the moment. I think what we're saying is actually very consistent with this direction thought. I would argue if there was chicken and egg, our chicken came first, but sort of because we've talked about a lot of this over the last year and we talked about it with sort of Oliver Lettmann as part of that review. In a sense, we're saying some quite similar things that one of the key factors is absorption rates that the other constraints can be managed over time and that in an easier planning environment, we should be able to do more.
All of those are consistent. I think we recognize what needs to be done in the real world to make that happen, which isn't always obvious when you're looking at it from a political point of view. But I don't think our sense is that there is going to be some radical shift that will suddenly make everything we're talking about not relevant or the financial returns sort of significantly worse than they are. I think we'd be pretty surprised if that happened.
If I could just ask a follow-up question. I mean, if I reduce what you have said a little bit to say, well, you're basically saying you're going to grow the returns, but basically you're increasing the payout ratio and you're shortening the land back. You're effectively I mean, if you're paying out more, you can't grow as quickly. And yet, the government wants you to grow as quickly as possible. Are you is there any conflict in that?
I mean
I think there is far less conflict. And this is not why we've sort of why we're planning to adopt this strategy. We plan to adopt this strategy because we think it's right. But I think there's far less conflict in this than there is in where we've been over the last sort of 7 or 8 years. So we are planning to grow the business from within our existing resources overall.
That means we have more cash available to pay out, but also means that we're doing more from the existing sites we've got and replacing them and continuing to work them harder. And we're probably growing sort of faster, particularly in 2020, 2021 or 2021, 2022 than we would ever have mapped out before this point. So yes, and at the same time, we're planning to do it in a way that is more responsive to customers and is really trying to update how the industry thinks. It's hard to see why that's on a better message from a government point of view, if you don't know what I mean. It makes me slightly uncomfortable that it's quite that positive, but it is.
So it's never perfect, is it? Sorry. If we do one on the same row and then move forward. Thank you. What are
you looking at
to make
the basic premise to underlying demand is at least that's a supply is ahead of supply until 2,030? Is it a basic assumption?
Yes. No, it is. But we've been I mean, there are so many different sort of measures. I mean, I had spent a lot of time during 2016 sort of doing the Redfern review, and we looked in a lot of detail underlying demand. And what yes, some very simple basic things became patently obvious when you do that and when you then start doing, whether it be individual focus groups and discussions with people or statistical economic reviews of household formation and where the trends are likely to go.
Demand constraint is not really the problem. It's the ability of that demand to be able to afford to buy a house at different points. So whether you look at recent household formation, projected household formation, demographic shifts, divorce rates, demand from sort of people still living at home with parents or a student in quite a solid combination. But if you look at it statistically, anecdotally, sort of you get to the same broad conclusion. And it's also our lived experience through the last 20 years.
I remember being quite uncomfortable with that sort of comment because it felt quite clear back in 2006, 2007. But actually, we're not saying that means you can't have cyclical changes in the market. We're just saying actually, unlike, say, Spain, where production was so far ahead of that underlying demand and then it takes 10, 15 years. If there is a recovery, it gives you a real sense of underpinning in sort of where the market is. Yes, the short term pricing will depend on factors that aren't really affected by that long term demand.
So just a quick follow-up to that. Do you think at some point
I think we're I think some of the growth has to, and we'll come back to that as we go through the other presentation. So definitely but that's more about Help to Buy necessarily than it is about sort of where demand sits. But yes, we definitely feel that, that growth should come from generally smaller products. Yes. Can we take just one more now, and then we'll move on because there's plenty of then chance to ask other questions for you today?
My question is sort of related because it's about Help to Buy. You're providing guidance sort of after 2023 in terms of cash flow and dividend, but the biggest uncertainty for the industry is what happens with Help to Buy 2021. So what sort of assumptions are you making? And does it matter
for your business?
First of all, it definitely matters sort of and there are always going to be factors that you can't completely control or be certain about that matter, and you have to take a view. Secondly, our view remains, and this is based on conversations that we have, the issues that we see, where we see the different pressure points for government, the decisions that we would take if we were them. Our view remains that Help to Buy will probably continue in some form after 2021. It still remains that it will probably be in a slightly reduced form. That's therefore our base assumption in the guidance that we give.
But it's also why we think it's worth us spending a lot of time and effort on making sure we've got ways of bridging that gap for different customers depending on where we end up. And we see, for instance, in Scotland, a significantly curtailed Help to Buy scheme. And so we have some experience of how we can manage that and how that might change. And the impact has been less than we would have expected. If suddenly the government came out tomorrow and said, right, we'll take away Help to Buy completely next week, then short term our views would change.
I don't think our long term view of what the right strategy is would change, but there would definitely be sort of a need to adjust in the short term sort of what was going to happen. I think our views of the ordinary dividend wouldn't change, but our views about where sort of short term returns would sit probably would. So we can never give guidance that's completely independent of what happens. But our base case is that it remains in some form but reduced and that we work harder to compensate.
So your comment about releasing the cash from the business within 6 months, that would be in response, say, to the situation that
helped
the buyer
with the sponsor. Yes.
And it's about how quickly you can land credit, as I say, is the biggest movement is about how quickly you can turn the business around into a different mode to at least sort of take stock of where sort of the environment is going to end up.
Good morning, everyone. I have quite a lot to get through this morning. So forgive me, I'm just going to jump right in. So Pete has said that we believe that the land and planning environment has changed and undergone a structural change in recent years. And as a result, we can change the way that we manage our land bank length and the way that we deliver our schemes.
And I hope that the next number of slides will help illustrate why we hold that belief. From a planning and supply side perspective, we've had a relatively liberal planning system roaming from 1947. But as long ago as 1923, there has been a presumption in favor of development of one kind or other, other than where there's clearly detriment to interests of public importance. And that principle remained ingrained in development until the inception and nationalization of planning in 1947. And that persisted through quite a liberal period, the 50s 60s, until in 1991, we saw the introduction of the Planning and Compensation Act.
The presumption then changed. It changed to a presumption in favor of determination in accordance with the development plan unless material considerations indicate otherwise a well known phrase. But it was a fundamental shift in the way the planning determinations were made. And it led to an unresponsive strategic planning framework, particularly in the absence of functioning and up to date local plans. In 1997, the Labour Administration came into power and their housing target was 200,000 units a year.
And they correctly brought forward PPG 3, which introduced a brownfield first philosophy and a target of about 60% of sites and housing to come from previously developed land. It introduced a sequential approach to site allocation, a minimum density requirement and it also sought to increase affordable housing levels. And when that was taken in combination with the 1991 presumption in favor of a development plan, it radically changed housing market supply in the negative. We then had in 2,004 the Planning and Compulsory Purchase Act. And it introduced regional spatial guidance, regional planning guidance instead of the County Structure Plan, which up until that period had delivered housing numbers.
And importantly, it introduced housing numbers or housing requirements as a maximum. At that time, they also changed local plans to the local development frameworks, which effectively caused chaos, confusion and delay in the system. So taken together with the presumption in favor of a development plan when no development plans were in fact coming forward. The PPS III, which was the updated version of PPG III, was issued in 2,006. And this was specifically in response to the Barca review in 2,000 and 4, which was really all around why housing land wasn't being delivered.
It retained that brownfield focus and started the introduction of a 5 year supply. But as it was guidance rather than a requirement, many authorities didn't deal with it in a responsive manner and there were only marginal improvements. We then moved into the Brown Labor Administration era and housing number requirements increased to 240,000. And then very swiftly, we moved into the conservative and Lib Dem Coalition And the housing numbers requirement dropped to 200,000 per annum again. But very quickly, we had a sense of what the coalition government were looking for by the introduction of the Localism Act.
They threw out the LDF process, which we had barely gotten used to and reintroduced the development plan system, which was a combination of the local plan Very quickly, following the Localism Act, we had Very quickly, following the Localism Act, we had the NPPF 2012. And if you remember that period, the localism and the bottom up planning was quite a concerning period. We weren't quite sure how it was going to work. But with the MPPF 2012, we had housing proposals being considered in the context a presumption in favor of development. We had a fixing of housing requirements through the objectively assessed need, albeit at the local level, locally derived.
But most importantly, we had the need for a 5 year housing land supply of deliverable sites. And failure to have that 5 year supply of deliverable sites effectively meant that the plan was out of date and the presumption in favor of sustainable development and the tilted balance applied. It was a significant shift for us. There was significant appeal activity, if you recall, around that time as the extent of the new framework became fully understood. But really what we have had since then is a system that, albeit with some negatives, particularly around greenbelt areas, is more responsive.
And we see housing land being delivered at a more reasonable pace than we did previously. We then had Help Dubai introduced in 2013. And it's a reminder to me that not absolutely everything is related to planning. And then in 2015, we had the conservative government being reelected and a 200,000 a year housing requirement of 1,000,000 homes by 2020. Since then, I think it's fair to say that we've had a period of nervous excitement around planning consultation, planning reviews and various acts being introduced.
We've had the Housing Planning Act of 2016, which introduced starter homes, if you remember, but also continued the supportive direction of travel. The May administration in 2017 moved to 300,000 units per annum housing requirement. We saw the Neighborhood Planning Act and the Housing White Paper coming through earlier in 2017. Again, all looking to speed up the plan process, introduce delivery tests and effectively reinforcing the importance of plan. And then finally, and more recently, the consultation only closed last week, the draft MPPF of 2018, again reconfirming the importance of housing delivery and housing supply through both the local plan process and that 5 year land supply balance.
I would say that there are some challenges worth noting within the draft particularly around viability and valuations and also definitions around affordable housing that are worth noting. But the direction of travel does remain positive. Moving on then and looking at the strategic land journey. I would just draw your attention that this graph is in hectares of land use rather than in numbers. And as a result tends to understate the impact on housing numbers and in particular apartments that we saw through the period of significant brownfield delivery.
So we talked about PPG3 before and how it changed land supply with a brownfield preference. And because of that brownfield viability and the ability to deliver sites became quite significant. And as a result, the percentage of apartments dramatically increased. And many areas introduced caps on greenfield land delivery. As a result, greenfield supply and conversions from strategic land fell.
We also had in some of the worst affected areas absolute housing moratoria through the HMRA, that's the housing market renewal areas, where because housing numbers were set at a maximum, authorities effectively stopped granting planning consents on anything that wasn't a previously developed site. We look to the 2004 Act, the slowdown of the local plan process and an aspiration to try and resolve it, which never really picked up momentum. But the importance of all of this is, as a result, there were significantly diminished levels of strategic land conversion and strategic land portfolios became quite stodgy. And in some regions, there was a complete wind down of strategic land activity. We saw a change with PPS III as I said earlier, but not dramatically.
So it was really the introduction of the Localism Act and the NPPF that saw significant increase in housing consents and housing allocations via the plan process. These have benefited strategic land supply conversions quite materially such that we're now exceeding our previous 40% target from strategically sourced land. Whilst I think it's fair to reflect on the context of best and efficient use previously developed land continues to be something that's emerging in policy. That presumption and the presumption for the 5 year housing land supply does give us confidence that strategic land will continue to contribute significantly to our housing delivery and to move to a higher target of 50% conversion. So I like this slide in particular.
There are 3 pillars to housing land supply in my view represented here. Need, I think Pete's covered off some of it. But suffice to say, significant housing need remains quite well dispersed around the U. K. From a plan perspective, I think you'll see an increasing number of green on this middle plan.
And local plan progress has been improving. It remains slow. I don't think it's fast enough. But many areas have produced a plan. Greenbelt areas remains a particular issue where there's little incentive or has been in the past for local authorities to bring forward their plan.
With the housing white paper and the emphasis in the draft NPPF, we should see a continuing progress and a little bit more drive for those reluctant authorities to bring forward functioning plans. But most importantly, we have the 5 year housing land supply, which is a significant and material counterbalance to the lack of an up to date plan, again, other than in greenbelt areas. I think it's worth noting that many councils continue to lose 5 year housing land supply appeals, even 5, 6 years after the original N And so it's fair to say that the local plant system is unlikely to meet all of our needs. But with these three pillars effectively each in operation, we should enjoy both a more stable strategic planning environment and a responsive policy environment if or when those plans fail to deliver. So one last time.
It's obvious, I think, although focusing down on the planning environment specifically, put simply pre MPPF, housing land supply was restricted by lack of viable planning consents. Supply was constrained and often uncertain. Post NPPF, whether locally approved or via the appeal process, the system has been generating more land supply and more consents. The planning consent reservoir is now such that we have confidence in a strong delivery pipeline. The overall number of residential units approved in 2017 is 21% higher than the preceding year.
And whilst local plan application process often remains frustrating, land is no longer the dominant constraint and we can modify our business behaviors accordingly. So looking at this graph, I think all lines are pointing in the right direction. Mergers and acquisitions gathered pace in the late 1990s until 2007. And whilst there were, of course, other business drivers at the time, there's no doubt that the inability of businesses to procure the land that they needed for growth was a key driver during this period. Land strategies of the time were both defensive and predatory.
So this graph, I think it is clear that the land market dynamics have changed significantly, reflecting a greater depth of housing land and planning consent availability. As a result, the land market has structurally different measures and different characteristics than previously with reduced competition and consistently higher investment margins than we saw in previous decades. So, matrix is well understood and universally applied within the business. And in the last few years, our site quality has continued to migrate from poorer or weaker locations with the majority of our land bank now positioned within BA and BB locations, which are good markets with healthy sales rates. We have remained disciplined in the lamp market, focusing on quality sites and areas where customer demand is high and where people want to live.
And we continue to believe that this quality location remains critically important to our strategy going forward. So just stopping off to have a quick look at our short term and strategic land pipeline. You'll observe that since 2010, we've increased volume and incrementally decreased our land bank size. Strategic land conversions have remained strong and steady with the percentage of completions from strategically sourced land climbing from 17% in 2011 to 53% in 2017. There remain good opportunities in the land market and our strength in converting land from the strategic pipeline enables us to continue to add strategic land holdings in a way which does not incur material additional market risk.
So I believe that the land pipeline that we see today is primed for the strategy that we're presenting. Hopefully, you'll note that about 38% or thereabouts of our short term land is in the larger site categories, whilst about 60% of our strategic pipeline is within that larger site category and super large. There are an increasing number of large sites available both strategically and in the short term market. I think primarily a reflection of local political preference to place housing requirements and fewer allocations than in the past. Though I think it's also an acknowledgment of the increasing level of infrastructure needed in order to support a quality housing development.
The increase in the proportion of large sites brings opportunity to deliver significant benefits to our customers in terms of the quality and place making that we can deliver, but also the financial returns that we can bring based on more efficient operation and the way that we deliver them. I think over time, it's fair to say that we've become of the view that managing large and complex sites on our own is more rewarding. In consortia, we often take the lead in planning and technical. We do drive health and safety because of our business commitment in this area. And among other things, we're thereby carrying a larger degree or a higher degree of the workload for these consortia sites, but ultimately reducing the proportion of the market.
A strategic land pipeline of large sites and a growing confidence within our operational business of our capabilities to deliver complex sites well on a standalone basis will enable us to deliver significant benefits to customers and also better financial returns. So taking a very quick look at current market. I think there remains good opportunity in the lamp market. But we are seeing material advantage on those larger scale sites, particularly with infrastructure requirements that excludes many others in both short term and strategic land markets. And I think our track record and delivery and our operational capabilities tend to differentiate us in the competition in this part of the market.
In the short term market, we're seeing increasing activity from new regional offices by others, the RSL sector and some SMEs. Whilst in London, we're seeing that pricing remains competitive for sites with planning consent. I think it is worth noting that the Merrill affordable housing guidance and the new emerging London plan, which is quite prescriptive, is likely to increase risk and reduce opportunity. And we are observing much more competition from other sectors in the London market. From a strategic market perspective, I think that we continue to perform very well.
And I would sort of draw attention to the fact that we have a dedicated team now in the London and the Southeast area, which has increased our presence and our success in this area. So from a land strategy perspective, we have a solid pipeline and a continuing good supply of new housing through the planning system. And we are now in a place where we have choices that we didn't previously have. And I think it's important to say that we will exercise them. We will focus on qualities on sites where there's attractive metrics and attractive locations for our customers.
We will increase the use of large sites for the reasons that I explained earlier. We will look to increase the percentage of low rise apartments in the right places in preparation for those market changes that Pete referred to. In order to deliver it, there will be an increased focus on our technical and planning teams, including earlier reinforce the fact that we do intend to stay in the short term market, but maintaining our disciplined pursuit of quality sites and unlikely to grow that land bank significantly. So Pete talked about sites this is a site. It's Great Western Park and I know that some of you will have visited it in the past.
And on Great Western Park, we have 2 sales outlets, Great Western Park and Brunel Rice. And there's a differentiation in the market that we're delivering there. We have 6 phases at present and we are building out of 4 factories. So historical or historically, where market demand exceeded traditional site build capacity of a factory, we would have added incremental pressure without fully considering the whole effect of the resource required. We've reviewed not just the efficiencies of management and supervision, but have considered the ability to deliver a consistently high standard of safety, quality and customer service.
We've taken a factory approach, considered the labor resources required, the material supply chain and delivery constraints and have identified an output level that enables us to build more homes with only marginally enhanced resources. And Chris will touch on this in a bit more detail. Increasing the output from each factory enables an improved workflow and consistency and quality in the finished home. This means that on larger sites and larger developments where there's the sales demand, we may have multiple factories operating independently of each other in different service parcels, such as on this example at Great Western Park. This will give approved efficiency the use of our managers' times and the number of homes that they're capable of supervising and even after taking account of the enhanced control resources for materials management or customer services.
I've also included in this slide a snapshot of what that site outlet and factories numbers would have looked like for 2017 and done a lot about a future gazing into sort of 2023 of what it might or could look like. So just to reflect on what a traditional approach would have looked like before our change in strategy, this slide shows that traditional approach and you might recognize this from some of the sites that you visit. Different flag colors represent different house builders, multiple sales areas across multiple phases by multiple developers. And importantly, at times of market stress, very divergent interests. Sites delivered in this way can often fail to maintain a good presentation from a customer perspective and can also despite best efforts fail to achieve a comprehensive and cohesive place.
Traditionally, each outlet would have had a production team and a sales area. And as Pete said, in some instances, multiple sales areas. In review, we believe there need to be a link between the number of factories and the number of sales areas. So unless there are other issues such as sort of geographical separation, a single outlet should be able to meet the needs of customers from multiple factories. This makes for a more cost effective approach, but it also allows us to increase the number of, for example, salespeople to be present in a sales area, help to provide a better service and experience for our customers.
So going forward, we'll increase the total number of homes that we deliver in a period with an increasing number of factories, whilst the number of outlets may not materially change. So the next few slides, I'll just take you through some of the things that are happening in that engine room. The operational capacity of the business and the industry as a whole is acknowledged to be constrained. But with structured investment and developing our skills and supply chain, we believe we can grow the capacity of the operational business. I think it's important to say that this will be an ongoing effort and it's not going to happen overnight.
But we have started by putting in place a number of initiatives that will increase the capacity to deliver and importantly maintain and improve quality. This has begun with strengthening and investing in our people and skills, including investment in direct labor, our apprentices, our production teams as a whole, as well as technology and process improvements. And I've captured some of those process improvements on the slide. But specifically around direct labor, we are working to knock down some of the barriers that exist in predominantly subcontract regions. We've been running a number of pilots across 5 businesses, and we'll be reviewing the lessons learned from those pilots over the coming months.
And the aspiration and the aim is for it to be an all in cost neutral process. Apprentices and apprenticeships will support our plans for direct labor and effectively we can grow our own over time and therefore is fundamental to our overall strategy. We will increase the numbers of apprentices. And more importantly, we're working very closely with our HR colleagues to deliver a more consistent framework and development path for apprentices through the business. Supply chain security will deliver and drive build efficiency.
With focus and greater standardization on everything from process, compliance, house types, design, suppliers, we believe we can deliver a greater quality and efficiency from our supply chain. We are working to build alliances and partnerships with the supply chain and we'll be seeking greater collaboration to deliver solutions to build quality and efficiency issues on an ongoing basis. From a TW Logistics, I think it's important that one of the benefits that they deliver is a longer lens into the supply chain than we would get with a sort of a traditional approach to supply chain. And our first point of negotiation is always to explore the potential to advance supply through TW Logistics. It has the ability to build stocks of materials if the supply chain risk exists and buffer operational businesses from shortages.
And this is particularly important where we move to large sites that are running particularly fast. And we'll be monitoring those high output sites much more carefully. I think it adds significant flexibility and is a tactical advantage for our business. And in recent years, we've buffered things like bricks and in particular block stocks and door supplies and particularly constrained times. And finally, and time today doesn't really allow me to do justice to the busy area within our sort of design and place making.
And I hope that we can come back to it in future presentations. But we've started with a detailed customer feedback and design review of a range of sites that we completed some years ago. We brought in an independent architect, and we ran a parallel process in house so that we could compare the outcomes. We've also been reviewing property price movements post completion on a number of these sites. We've undertaken a series of quite detailed engagements with our customers who have lived on these sites for some time, and the feedback from that has been particularly rich.
These assessments have helped us to understand more about what our customers value in the longer term, not just their homes, but also the communities within which they live. We're now in the process of developing skills training, bringing those learning points from the exercises to our design work, including but not exclusively feeding into the development of our new house type range. I hope you find that helpful. And I'm happy to take any questions.
I was wondering is there anything that you can see as being structurally different in how the house building cycle worked pre-nineteen 91 better post-nineteen 91? Because you've got such a totally different environment. What are the structural differences for the industry during that period?
I mean, I think there's a number of things. There's been a significant amount of consolidation since probably the end of 1980s. There's been land supply I think drove an awful lot of that consolidation. We have seen during those downturns a significant move away from direct labor to the use of subcontract. And some of what we're talking about direct labor is a recognition that whilst we can't go all of the way back to those sort of mid-80s period that direct labor gives us additional agility.
It can deliver significant improvements in quality. And it can help buffer us from some of the stress and strain that we would see within the subcontractor base.
Can I add and this is sort of it's not so much a direct response to the question, but a sort of parallel example, because I don't just think that it's the industry was different back in the '80s under a sort of different planning system and we'll revert to that? I would draw a parallel with the car industry and lots of other industries that you saw through the second half of the '80s and '90s, becoming much more efficient, becoming much more customer led, consolidating supply chains. And actually, I think through the last 25 years, the house building industry hasn't moved on anything like lots of other industries because of that. And even if you take the site outlets piece, can you imagine going to a sort of auto park and finding 3 different Mercedes outlets selling essentially the same things competing from local dealerships, even when they don't own the dealership, if you see what I mean. I think because of the land constraints, our industry didn't move on in many of those ways that other industries did.
And a lot of what we're talking about is trying to move it on because we don't think land constraints were as big. Yes. A couple of questions,
if you don't mind. You mentioned house types going to be consolidating, rationalizing them. How many house types are there now? And how many are you going to get down to?
In a few weeks, it will be 47. We have a very diverse portfolio. We operate right across the U. K. And over time, it's not entirely unreasonable that the house type range grows in reaction to different local authorities with different policies.
Really what we've done is we've taken a really good hard look at those trying to determine are they truly differentiated or are we carrying extra technical sort of weight just for relatively minor changes. And in consultation right across the business, we were able to bring that hoist type range really back into a controllable level. I want to say we're probably at about 47 hoist types now as our core range. In terms of going forward and in terms of a house type review, I think that we could probably reduce that further. But it does need that investment of thought playing back the customer requirements, ensuring that we are alive to the needs and sometimes the very different needs of the planning system.
We want to create an opportunity for our production teams in particular to be building a repetitive well tested product. But we have to ensure that we're agile and flexible enough to achieve planning permission in the 1st place. So it's always maintaining those tensions. So a little bonfire every now and again to bring everybody back in line is pretty healthy, and that's what we've gone through recently.
Just one for me. Just on sort of the target 30% direct labor. Can you just remind us where you are now? What percentage of your direct labor? Yes.
We're at about 15%. I think we've got about 750 direct labor employees at the moment. Okay.
You've obviously painted a very favorable and supportive view of the land market and your confidence that that's sustainable has increased. Are you surprised you haven't seen more small, medium sized house builders come into the market? And maybe if you could just talk about the trends you are seeing there? And would you expect them to come and given the returns and margins you've been talking about today?
Yes. I think that it's sort of a tale of 2 halves. We have seen some of the sort of SMEs at regional level becoming more active in the short term market. They're predominantly focused in a part of the land market that we don't occupy, sub-fifty units. But I would say despite seeing that activity, we haven't seen a massive resurgence of SMEs.
I mean frankly, the cost of entry, the burden of regulation remains a significant barrier to SMEs. We're not in their areas of market. I think that authorities will and should look at a broader width of land type in order to encourage them. But really that cost of entry, the burden, I mean, when I look at our teams and the expertise that those teams now carry compared to what they would have looked like in the early 1990s fundamentally different.
You wouldn't expect the government to be
able to do anything to make it easier or change that cost?
I think we've tried on a number of things. If you look at the small builder fund that Homes England have introduced on that very point around policy encouraging the allocation of smaller sites. But until they remove some of the barriers of getting into planning and there's a whole suite of costs and risk that can't be underpinned by debt, then that's really where the fundamental problem is.
So just a very quick
follow-up to the point on small sub-fifty unit sites. Where you've seen that happen?
There has been some impact. And I think that the smaller the site opportunity to about that sort of 50 units there is price pressure.
I just wondered what you thought the time line was for the remaining local authorities filling up their 5 year land supply. And as that happens, to what extent you worry that land supply would just incrementally diminish?
I'd have
to say I'm good, but I'm not that good. There's the biggest issue remains authorities around greenbelt, because Greenbelt is so significantly constrained and protected in policy terms. So those authorities, St. Albans, York, you'll have seen a number of them in the press over the last year or so, are always very, very difficult. And 5 year housing land supply is not an argument for housing in those places.
I think I am
I think I am a passionate believer in the local plan process.
I think with investment in local authority resources, it can work. And if it did work, the level of certainty that it would bring to our business and other businesses would be fundamental. And we potentially could see another shift. But I'm not naive enough to think that after all of this time since 1991 that it's going to be an easy journey. But the government will push authorities more and more, particularly through the delivery test to bring forward plans.
And they wrote to 15 of the worst performing authorities last year to try and drive out that sort of laziness. So I think that we should start to see a change over the next few years. But those greenbelt areas and particularly the greenbelt authorities around London, I think, will remain quite difficult.
And land authorities have reached the 5 years. Have you noticed land prices moving up at that point? Or is it the fact they have to keep maintaining that 5 years by doing another year of supply each time? Has that kept prices low?
From a pricing point of view, the deliverable, so it's a 5 year supply of deliverable sites has kept a constant flow. And so what we haven't seen where we did in 2000s where authorities met their housing requirements and they pretty much pulled down the shutters and that was it. So we're not seeing that. So we're seeing a relatively regular supply of land, which is keeping land prices reasonably in control.
Just to answer the time. I mean, I've got another 3 questions out there. If we take those, but if you can keep it to maybe 1 question each, and then we'll move on and there'll be more time to pick
up questions. Okay.
Good morning.
Andy Murph from Bank of America Merrill Lynch. The question I had was about apartment blocks. You mentioned on one of your slides perhaps increasing the density or the usage of apartment blocks. I was wondering what proportion across the private estate are apartments now and what you think they might be moving to? What impact that may or may not have on the margin and whether that is impacted on a regional basis from one region to another?
Okay. I think I would be quite careful and say I'm not talking about apartment blocks per se. And I would ensure that it's clear that we're talking about low rise apartments that are reasonably commonplace in suburban developments. We're not talking about high rise investment. Our numbers at the moment are about 19% of our overall completions.
I can't split that out just now between affordable and private, but I can have a look at it and come back to you. I think that without or leaving London sort of aside, I think that we should be looking to increase that probably to around 25 percent. Your point on margin, with Help to Buy operating at the moment, it does have a very unusual effect around departments and they may not be particularly attractive, but it's more the foresight. It's planning. Some of these large sites we'll plan now.
They will be building out well past 2021. So it's ensuring that we're building in flexibility and the opportunity to bring those online when and if market changes dictate. Thank you, Steve.
It sets out 25% as a sort of strategic sense of where we should be apartments back in 2011. And actually it's then continued to trend down because combination availability in the land market helped buyers meant people buy up. All we're flagging is as we look forward 10 years, that's got to come back to probably where we first thought of, which is kind of somewhere in the low 20s, 25 rather. It's not a massive shift, but directionally, it's got to go that way over time.
Just the picture you're painting obviously is more volume, not necessarily more sites. The delta obviously is back to the sales rate. Could you just discuss a bit about what you feel how you drive that even higher than one of the highest levels in the industry at the moment? And in effect, is it bringing us back full circle to the other point that was mentioned about broadening into PRS and things like that? Is that ultimately is that in effect the differentiation between the two things?
Or is there something else fundamentally you're expecting your sales rate to be higher?
Okay. I think that that's a really excellent question and one that I expect Chris to answer in detail. So if you don't mind, I am going to give him a hospital pass for that.
A very quick one for me. Pete referred to entrepreneurial spirit and trying to culture it. Were talking about reducing the number of housing types. Is this a fire burn that then the number of housing types moves back up again as you give all the different regions their ability to maximize the affordability or however the phrase was? Is this a low number that will then move back up again?
Again, I think it's a fair question. And to the extent we do need to remain reactive and proactive in the market. So I'm not going to give a headline or a ceiling on that. I mean, I think the point around entrepreneurialism is that it needn't necessarily be outside certain good operational dynamics and operational processes. And as a volume house builder with the desire to increase volume but maintaining quality, then maintaining a reasonable bracket around the number of and variation in house types is an important part of that.
And the entrepreneurialism can operate in many other different ways within that framework. So our expectation is to bring out a house type range that is well thought through, is responsive to our customer needs and where we feel our strategy is going to take us and to control that then as best we can within good business dynamics, which means that there is likely to be some growth glimmers and a little bit of movement, but to maintain that and control it?
It's a good question. But as the question kind of presupposes, it's a really difficult balancing area. We have a really clear strong rule book. I've worked in this business when we didn't have a rule book at all and we had lots of different brands from lots of different histories. And the cockpit factor is significantly greater in that environment.
We have no particular desire to go back there. But it's finding the balance in each area of how to make that work. And in house types, it's having a small type core range is important. And as Jenny has sort of said, we will go through the cycle again. You can set your clock in 5 years' time.
We'll be saying, right, we've got to call it back down again. But it's a bit of a case of saying, well, okay, right, we've got a call range. Let's focus on that. Let's develop. And then on a sort of very specific basis, turning it back and saying, okay, right now you've got the opportunity to really test, challenge, innovate, change this range.
Let's do that process really quickly. Let's make the changes and then let's all go out and go and do that rather than we're reinventing the wheel in 24 different businesses consistently. And so it's getting the balance right. I think we'd rather be where we are today than where we were 15 years ago with the range. But actually, it's just sort of opening the box to let people really test it and move it a bit in some key areas where we think there's value.
And that feels like a good place. Thank you, Jenny, for us to have some coffee.
Good afternoon, everyone. I think I have met the vast majority of you at some point over the last 12 years. But just for the few that I haven't met, I thought it would be helpful to just give a little bit of background. I qualified as a Chartered Accountant with Arthur Andersen in their audit and business advisory practice in London and Sydney, Australia for about 10 years working for them. And then for the 3 years after that, I worked solely on private equity and corporate transactions with Deloitte in London.
And that was before I joined Associated British Foods to lead their transition to IFRS. I joined George Wimpey as a Group Financial Controller in 2006. After the merger, I held the position of U. K. Finance Director 3 years.
And then for the last 7 years, I've been in operational roles, firstly as the MD at our South Thames business and then more latterly, leading the London and Southeast division, as Pete mentioned earlier. So got a lot to get through in the next 20 minutes. So I will run at pace. But I'll kick off with how we feel about customer centricity and what we're doing in that space. I'll try to translate what Pete and Jenny have already told us about site efficiency into sales rates.
I'll touch on cost and efficiency that we're just initiating. And then I'll talk about balance sheet, pensions and cash all in 20 minutes. Before I took over as MD at our South Thames business, And that was in January 2011. As you can imagine, I took a pretty good look at the financial and operational statistics. And one of the things that stood out was that their customer satisfaction recommendation score was 57%, and that made them a 1 star builder.
And that was at a time when the group was roundabout 88%, 89% and very close to well, at the right at the top end of the 4 star. And I did a conversation with Fergus, who used to run our Northern business, so Daniel's predecessor. I'm sure a lot of you will remember him. And he gave me some sage advice and told me to go and meet those customers. And I remember vividly meeting the first customers that I met.
And I remember feeling deeply uncomfortable as they conveyed their story to me. And I felt uncomfortable not because they were trying to make me feel uncomfortable. I felt uncomfortable because they had placed their trust and their savings in us, and we badly let them down. And it's had a huge impact on their lives. And that meeting and a couple of other meetings around that time galvanized me into action.
And the output of that action was that in the calendar year of 2011, that recommend score rose to 94%. So comfortably, 5 stars. But those uncomfortable conversations continued. And as you might imagine, the next year when my focus shifted to other areas of the business, the score dropped. And I had people queuing up to say to me, Chris, I told you so, because you can't maintain customer service calls at that level in the Southeast because customers are just simply too demanding.
Now that was rubbish. But what it did make me realize was that the changes that I put in place were flawed. They weren't driving permanent change. And I realized that we needed a wholesale cultural change in that particular business unit. And when I before we started that engagement, I think it would be fair to say that I thought it was going to be very tough.
But once we'd started the engagement, I realized that pretty much everybody I was working with felt exactly the same as I did. And not only that, they were tuned into the frequency of the customers. They were listening to the customers. They knew what the problems were. And they also knew how to fix them.
And together, we fixed that situation. And for the last 7 years, that business has not recorded a recommend score of less than 85%. For the last 3 or 4 years, it's punched well above 90%. And in preparation for today, yesterday, I had a look at their year to date score, and they're running at 99%. Off a not insignificantly statistic basis of 95 return surveys.
So I think that's probably a good place to start a discussion on customer centricity. So over the past 3 years, the group's strategy has embraced the need to be more customer centric. We've looked at the experience that we deliver to our customers across the customer facing processes. So marketing, sales, production and customer service. And we pulled that all together so we have one view and a much more aligned approach.
More recently, we've also undertaken a lot of extensive detailed market research. And we've been very clear in doing that to not just restrict ourselves to customers who are our typical customers. We've gone to renters as well and also people who say that they would never build never buy new build. The clear and insightful output from that research is that no matter the profile of the person, they all have 3 essential emotional needs. They want to be reassured that they're making the right decision.
They want to be treated with respect. And they want to have pride in their home and in the community in which they live. Now these needs, and in particular, our detailed understanding of those needs, are helping us redefine what it means to be a truly And they will definitely shape what we do in the future. And they will definitely shape what we do in the future and how we do it. So these are some examples of that in practice.
So these are examples where those needs are already shaping what we're thinking and what we're doing. So we heard from the customers that they want reassurance. And they almost want to feel like what it is to live in the house before it's built. And one of the very simple ideas that we have in this regard is to perhaps offer them a slot. They could book a slot in our show homes.
They could take their families uninterrupted by other customers and by sales execs and just perhaps have a meal or watch a TV program but get a feeling for what it's like to live in that particular house type. We heard from the customers that they want respect, and they want to trust that the company that they are giving their money to is going to give them the right advice and the right service. So we launched an academy of customer excellence, and that will seek to train all of our customer facing operatives so that we deliver a consistency of service across all of our customers. And then lastly, we heard that customers want to feel pride in their home and in the community in which they live. And one of the things that we're looking at there is developing a community hub app.
So something that brings neighbors together. It might share news. It might be a way of arranging community events. So none of those changes are particularly earth shattering. And there is a long list of them.
But we believe that the combined incremental change from lots of these changes is much greater than the sum of the parts. But now let's move on and talk about a more aspirational and customer centric solution to a very real problem. So one of the target markets that we've been looking at is the Neely buyer. And these are people who want to buy, and they are probably earning a wage that would allow them to service a mortgage, but they just don't quite have the deposit that they require. So the 2 thirds of, Neely buyers who are private renters, their 3 main issues are, well, firstly, saving that deposit while they're paying a rent not feeling entirely secure in their property simply because the length of the tenancy and the prospect of the landlord serving notice and any other restrictions that the landlord might place on them.
And then lastly, a feeling of just being overwhelmed by the complexity of the house buying process. So meet our very own Neely buyers, imaginatively named Mr. And Mrs. Smith. They have a combined income of £55,000 They want to buy a property of £250,000 They have no savings to put towards a deposit.
And they have a surplus monthly income of £625. So to get a 5% deposit, that would be £12,500 in this case. And they would have 20 very frugal months of putting all of their surplus income into getting that deposit. If they can access Help to Buy, it doesn't do them any good because they still need the deposit, as they would if they went for a 95% mortgage. So it is a real problem.
Springboard is a rent to buy product that will allow prequalified Neely buyers like Mr. And Mrs. Smith to rent a new home from us, save more quickly than they would do if they were renting elsewhere and ultimately buy that home. Why do we think this works for Neely buyers? Well, their rental is no longer just dead money.
Some of it is being put aside to be able to contribute to their deposit. For them, it feels much more like owning from day 1, which is really important to them. And undoubtedly, the process is pretty simple and clear. For us, why might it work for us? Well, this would recycle the capital much more quickly than PRS would.
It can be rolled out on any site very quickly. And probably more importantly than anything else, it serves a segment that we don't currently serve. So that is just one product from a whole heap that we have been working up by listening to customers. We have a number of other products that are going through a similar sort of process. Some of them will gain some momentum and be piloted, and some of them will just fall by the wayside.
But what is absolutely clear is that we will continue to listen to what customers tell us, and we will try to develop products that address their needs and wants and then bring them to market. And ultimately, we think that, that's going to make us a more valuable and sustainable business in the future. So having looked forward, I think it probably makes sense for me to just take a brief look back. 2 years ago at our Capital Markets Day in Oxfordshire, I talked about how important customer service was to us and how we saw it as a measure of the quality and the sustainability of the business. I talked about the investment that we are we were making in our customer service people.
I talked about the improvements that we were making to our of the changes that we were making to improve our customer journey and to improve our build quality. Since then, we've introduced the Academy of Customer Excellence, which I mentioned a little bit earlier. But also, we now have a customer portal, and this provides accurate and immediate information about customers' home all the way from the point of reservation to after they've moved into their home. And quite importantly, it also allows them to log any issues that they have with their home and see in real time what we're doing to address them. And that portal was developed, again, by listening to customers.
And the feedback that we've had initially has been very, very positive. So lots of things that we've been doing over the last couple of years impacting on customers. And the next slide tells us whether that's had really had any impact. So this chart shows satisfaction score since October 2015 for 4 questions that are asked of customers prior sorry, 8 weeks after they have moved into their homes. And I could spend half an hour easily on this slide because there is so much to talk about, but we don't have that time.
So in a nutshell, it is demonstrating pretty clearly that the focus that we've placed in this area is driving better outcomes for our customers. If I was to pick one thing out, it would be the bottom line, which is the percentage of customers who are recording less than 11 snags. And that has shown great progress over that period. And it also happens to be one area where we are putting clear competition. All right.
So as Pete and Jenny have already mentioned, we reviewed the operational capability, and we are confident that we can deliver more volume from our larger sites. And the table at the bottom of this slide illustrates what impact that might have on private net sales So some important points to note as you process the figures. Firstly, the indicative profile of sites and volume is illustrative of a typical business unit in, say, Daniel's Northern business or Nigel's Central and Southwest business, a bit different in London and the Southeast with more complicated product. The volumes that are quoted there are total volumes, and we've assumed a 70five-twenty 5 split in terms of private to affordable. And lastly, it's worth noting that during 2017, there were 6 sites across the business where we delivered more than 130 legal completions.
So that gives us a great deal of confidence that this strategy is not based on theory. It is based on what we have already achieved in practice, just not uniformly across all of our business. And as you might expect, I took a look over the course of last week at the customer service scores across those 6 sites. And happily, the average of those was well in excess of 90%. So it proves that you can deliver the volume, and it doesn't come at the expense of service or quality.
Moving on then. Increases in volumes, increases in house prices and certainly the increase in the supply of consented land are all combined since we set out the original strategy in 2011 to provide a sort of a stellar improvement in our financial performance. So it wouldn't be crazy to imagine that a little bit of inefficiency might have sneaked in somewhere along the way. But more importantly today, as we stand here setting out a new strategy, I think we have a much keener understanding of what differentiates us. And in particular, that gives us clarity on what costs and activities are aligned with the strategy and which costs and activities are less obviously aligned with the strategy.
So I think for that reason, the timing of this cost and efficiency review is particularly good. If you looked at the P and L in 2017, you'd see that there were £3,100,000,000 of operating costs flushed through the P and L. And if you extracted the land cost from that, which is £700,000,000 then obviously that gets you to £2,400,000,000 And hopefully, the chart on the right, the 2017 column should add up to that £2,400,000,000 And all of those costs are, to varying extents, within the scope of this review. So just picking out a couple. I think it's fair to say that much of our historic strategic procurement efforts have been directed at the build cost superstructure materials.
But if you consider that our 2 top material segments, which together attract a spend of around about £50,000,000 they are supplied by in excess of 40 suppliers, which gives you a feel as to how much more efficiency there might be in that area. And also moving on to groundworks. If you look at that number, it's a pretty significant figure. That number has grown considerably since 2010 simply because we are delivering, as Jenny has already said, many more units from strategic sites. Those strategic sites require more infrastructure and therefore more cost in the ground.
Our procurement of ground workers is largely localized and quite fragmented. We've got about 140 different ground workers across our sites. And we think that there are some opportunities in bringing perhaps some consistency and some best practice to our approach in that area. I think it would be remiss of me not to talk about admin and other costs before I leave the slide. So it's important to note that since 2010, really, our business unit structure has not changed.
So the increase that you see there is largely people related. But as you've heard today, we have made structured investments in both skills and customer service that will account for part of that increase. So overall, I don't want to leave you with a feeling that there's lots of easy stuff to go at because if it was easy, we would have already implemented it. But we do think there are opportunities, and I will provide you with an update on where we are with that in July. One thing that definitely isn't changing in this strategy is our belief that the housing market is cyclical and that maintaining a strong balance sheet will continue to give us the resilience and agility that we desire.
Obviously, we want that resilience to withstand anything that the market can throw at us, but more importantly, the agility to take advantage of those conditions as they appear. Now the chart on the right quite simply just illustrates that equity, after deducting the dividends that were approved at recent AGM. That equity is financing our land bank, which means that the working capital
expected.
Those of you that are familiar with Page 127 of the annual report and accounts we'll know that the last triennial valuation of our defined benefit pension scheme was the 31st December 2016, and that yielded a deficit of GBP 222,000,000 Strong investment returns since then have reduced that deficit to £23,000,000 as at the end of March, which presented us with an opportunity to make a bullet payment of £23,000,000 and fully fund that deficit. So we took that opportunity. The scheme is now fully funded, and the contributions to the scheme have been suspended. And those contributions will only resume if the scheme funding drops below 96%. And because I suppose the interest rate and inflation risk is pretty well hedged in the scheme, then the main influencer on the funding level are growth assets.
And those growth assets would need to drop in value by more than 6.5% in order to breach that 96 percent funding level. And there are some numbers on the slide that give you our expectations in terms of contributions going forward. So last slide, but certainly not least in terms of importance. Business has had a very strong track record of cash generation in the years since the 2011 strategy was set out. The new strategy will drive well, I suppose, in generating increased volumes and reducing the scale of the land bank, we'll drive more profit and more cash than we would have generated had we stuck with the original strategy.
And as Pete noted earlier, we are looking at other ways to of other routes to market. That will involve us spending around about £100,000,000 over the next few years in broadening our products. But overall, the effect of this new strategy is to enhance the minimum annual return for our shareholders via the enhanced ordinary dividend, which will be paid throughout the cycle and including in the event of a normal downturn. And we would absolutely expect, if market conditions stay stable, that we will continue to pay a substantial special dividend, as Pete mentioned earlier, at least in the order of that that's already been announced for 2019. I think that's it.
So questions?
And just in the interest
of time, if you could And just in the interest of time, if you'd like to take the first three or four questions. And then we'll make sure that if there's any that are missed, if they don't get answered over lunch that there's a chance to ask Chris questions at the end of the day as well.
Good afternoon. Mine's just around the direct labor and the cost efficiencies. Can you give us some examples of the loyalty, I guess, of the direct labor that you've kind of got in house already and kind of the cost versus the subcontract labor as well? And are there any regional variations?
Yes. I mean that will be obviously part of what we do as part of the cost and efficiency review. So I don't want to give you too much direction on that. But the direct labor that we have has been very much based historically in the Northern businesses. And it's certainly interesting when you look at perhaps some of the build times in businesses that have direct labor versus the businesses that don't.
So what I'm trying to say is that cost analysis is not just as simple as comparing what we pay to our direct labor people versus what we pay to subcontractors. There are a whole heap of other benefits and disadvantages around that, that all need to be priced in. I think certainly in the Southeast, there was a prevailing wisdom that it was pretty much impossible to get a direct labor force because of the transitory nature of that workforce. And we have made some strides actually recently, heavy investment in and partnership with some colleges, technical colleges. And we're really quite excited by the number of apprentices that we are taking on and the retention statistics that we're managing.
So it's something that is very much in flux and very hard to give you a direct answer answer.
I mean historically retention has been very strong actually better than sort of normal salaried staff and costs have been less. But historically there's an awful lot of history in those regions. I remember giving a sort of long service to a scaffolder who'd done 49 years of service and was our longest employee by about 5 years at the time. And that wouldn't have been massively unusual. But as Chris kind of saying, as you take it into new areas, starting from scratch and what you really need, and Chris has seen this in the Southwest TEMs business, is somebody really passionate internally at a local level who really sets the scene.
And then you feel you can create that momentum. But yes that transition is probably marginally more expensive to bring people in house. In the end, sort of you've got a lot less volatility and the costs tend to come down.
I mean one very sort of simple example of that is if it starts raining, we don't pay the subcontractor because they're not laying bricks.
But if
we got direct labor, we're paying them. So it's a pretty complicated equation that
I've got a follow-up on the dividend and the normal market downturn.
Yes.
Can you give us a reminder, obviously, the benign land market we've had and house price inflation over the last few years, how much of a buffer have you got given the ordinary dividends cut around net assets? How much price deflation before you cut into net assets effectively?
Yes. If I
answer it in a slightly different way, and I think we're being pretty clear in the statement that we have stress tested that what we consider a pretty full on down to the 20% drop in price and a 30 percent drop in volume. And we're happy with that position.
I just have a question in terms of your routes to market. And I guess the rent to buy, it looks like you're using 4.9% as the yield. Are you talking about charging the customer less than that so they can save elsewhere? Are you talking about charging more than that so you get more income coming in? How do you make sure they buy the home at the end and don't have parties and whatever else?
I'm very concerned. But also if I ask all the bits and then you because it will probably be your title in one answer, I think. Why is that better recycling capital under PRS when PRS quite often at the moment is done with outside equity? And you talked you didn't talk about shared ownership with housing associations maybe the other side of that ownership. So I wonder if you can just tie together, how we should think about those routes to market?
What are the best? How do you make sure that you do get the best value?
Okay. So firstly, in terms to be really clear, what we're not asking in that product is anything other than for that customer to pay what the market value is for that rental. So they are not paying any more than they would if they were in exactly the same house and it was really was privately rented. All we're saying is that we are going to take part of that rental and put it aside for over a 2, 3 year period as they save themselves. And then when they come to buy that property, that cash that we have effectively set aside for them, we will release to them.
Hopefully, that answers part of your question. In terms of the returning the capital more quickly, if you think about the PRS, this is sort of if we were selling units into a PRS provider, absolutely take your point, that would return capital pretty much well, depending on what their payment profile is very quickly. And we do, do that. And in fact, I think I was talking with somebody earlier about scheme in Walthamstow that we have done that on, and we've got another few coming up. What I'm talking about is if we were holding PRS, If you were the investor, then clearly, this turns your capital a hell of a lot more quickly than if you're holding the capital on your balance sheet.
And then shared ownership, you mentioned. And I was at pains to stress that, that is just one product. We have another. Funnily enough, I think it's called Stepladder that is a shares ownership product that is going through exactly the same sort of process. And as I said, some of them will gain some momentum.
Some of them will fall by the wayside. That was just an illustration. You shouldn't take that we're going to pile lots of time and energy and resources just into this one product. This was an illustration to give you insight into the thought processes and the outputs of the process that we've been going through.
And that's a net is you're willing to keep more capital in the homes for longer rather than take a lower selling price in these scenarios?
Yes. I
think inherently by what I've said, the answer to that is yes. But all we're talking about with this is really clear that this is just a pilot. This isn't something that we're going to be rolling out on every site in the short term. But clearly, if HelpSpy was dropped tomorrow, it is just it will become one tool that, out of many, that we could deploy.
I think that's right. And I think the key point what we're trying to do is give you a sense of some of the thought process and the conversations. But we've got 2 objectives from this pilot. 1 is to try and test and understand what is our instinct is that a product like that is very attractive from a customer point of view and really understand that and what the limitations are and what the structures would be like and how it impacts on sales rates and how quickly sort of that sort of product would move. The second is to really understand in a world where the environment does change, affordability becomes more constrained, because we have enough buyers at the moment, But we're trying to look ahead through this process and say there will be times over the next 10 years where we don't have enough buyers.
How do we make sure that we broaden sort of our base of attractiveness to those nearly buyers. And we may not have the choices on the short term in terms of PRS at that point that we have today. So a lot of this is about really understanding what's driving the customer, how we think we can make it easier for them, sort of what that process would look like. So we've got good choices. We don't know if we'll find something through that that works in this environment.
It's all we find is a defensive set of measures that we can then implement quickly in more challenging times. Both of those have value to us. So if you said how much volume of this product do you think you'll do, the answer is you shouldn't assume anything until we've worked really through that math. It's a learning process.
Okay. All right. Where's the I'm not sure where the microphones are. Oh, sorry. You've got
the mic
on the mic as well.
And this is really back of a fag packet stuff. But if your net spend on land under the new strategy doesn't really change much, But you work the asset harder, there's more volume, that volume converts at the margins you've said and equally then converts 80% into cash. As far as I can see so far, you've only committed, whatever, £50 odd million to the additional ordinary dividend cost per annum. But I mean, as I said, it's back of the envelope, and I may be wrong in the math completely. You're going to generate €100,000,000 to €150,000,000 at least, I would have thought, of additional cash every year.
Yes.
So
what's the missing bit? Is that being spent on something else? Or is that simply going to make the balance sheet even stronger in the next few years?
Okay. Well, the first thing is that ordinary dividend is increasing by £100,000,000 each year. So that takes some of the difference. But we will be spending more on land because if what we're saying is that our short term land bank is remaining around about the same level and our volume is increasing, then by default, the run rate of land purchase increases. But yes, I mean undoubtedly, we would expect that we will create some headroom.
And that's part of that headroom is why we're taking and the investment of £100,000,000 over the next couple of years into other routes to market, that's partly what that's going on. Sorry.
Can you just sort of
I'm not sure what that in practice actually means. €100,000,000 is what you're saying. Some of that will go into you investing in a PRS type vehicle or
Yes, absolutely.
So So the €100,000,000 is put aside?
Yes. So that £100,000,000 and it might be JVs, it might be direct investment. I certainly would expect that some of it will be PRS, but not all of it. And it's really about a very small amount, may well be in piloting the springboard product that we've just discussed. And it may well other small chunks allowing us to pilot other products that give us that flexibility and increased understanding for when affordability constraints in the future become tougher.
Can I just sort of one final bit to that? What has your broad assumption being on the reduction of the years land supply rather than the physical land plots of land, are you assuming you go from 5 to 4 in 5 years or longer than 5 years or shorter than 5 years?
Yes. I mean I don't think it will be an average a glide path where we go uniformly down from where we are to where we're heading to get to. But yes, I think absolutely, 5 years, we would that's where we would expect to be getting down to that 4.25 ish level.
Can I take one more question, and then we'll answer lunch?
Sorry, the front.
Thanks. So I was just going back to the Slide 13, where you've categorized the sites by size and the intended uplift in sales rates. And I guess it's more an observation than anything else, but the change in categories kind of 2 to 4 are enormous really to unless I'm reading it wrong, but to think that sites of 250 go from 0.8 to 1 per site, is that right? So a 25% uplift in the sales rate on the next two buckets of 80% uplifts in sales rates. I mean, I don't know quite what the question is, but they seem huge kind of leaps of faith for
us to go away and plug in, if
you like. And are you saying that demand has always been above the sales rate and you haven't been able to build to it?
Or is it that PRS
and buy to rent bridge the gap? Or any extra,
I guess, scope there?
Yes. I think the first of those really, I mean, you will have heard, and certainly I've heard, Pete, in recent years, When we've talked about last year having a very strong sales rate in the first half and Pete guided you to a much slower sales rate in the second half because of availability. And I mentioned those 6 sites that we have delivered more than 130 homes from, those delivered the sales because they're in good quality locations. Jenny put up a slide that shows where our land bank is based. And I'm not saying that every single site can take a lot more absorption because that would clearly not be true.
But what we think we can do a lot more effectively is to plan sites so that we don't have periods where there is a lack of differentiation in product. So if we plan these larger sites and clearly with a larger site, you have more ability to plan and plan it in detail so that you have the full spectrum of products available pretty much all the time, then that can certainly increase your sales rate without any real impact on the market conditions. So yes, I can see that you would look at this and think, Wow, a lot of it is about having that product available. And I suppose if you look at the site in Oxfordshire that Jenny put up that a lot of you will have visited 2 years ago, Last year, that site, I think, and I'm sort of looking in Nigel's direction, I can't find him, did over 300 units from 2 outlets. And we'll have had a sales rate in excess of 2.
So 4 if you combine the 2 outlets, but over 2 on each of those outlets. So it's not impossible, but you have to take each location
differently.
If you
just stand back and sort of almost summarize, Will, because there's a number of things from the different presentations that kind of all tend to lead to that same point. We have been and continue to, and as Jenny said, expect even more to buy more large sites. We as a business have not been partnering with our competitors at the earlier stage on many of those sites in the way that we would have done. So we have taken a view as Jenny laid out that actually we were doing the work, spending the money, making the effort, but actually to a large extent others were often piggybacking off that. And a lot of our reason was risk.
But if you really stand back and look at it on any meaningful measure, none of these sites individually give us any sort of large scale systemic risk. And so that's been our approach to large strategic land sites for a long period of time now. We don't have 2 brands. And we've tended to see double heading outlets as something that we will only do if there's really clear circumstances. That effectively, all taken together, leads us with a set of pent up demand on a lot of those sites.
We have some where we've then pushed them and put the operational capacity behind it with production. And we can see and it will the absolute number will depend on the market, but we can see the number is very different given all of that backdrop to exactly the same site 15 years ago with 3 sort of major competitors right at the beginning and then passing off pieces and everybody having 2 flags, yes, there's an awful lot of potential there that we're not tapping into or we're only tapping into on a proportion of our sites. And so that's why that movement is so large. And it's not just that we can see it on 6 sites. We can see lots on them that we see a huge gradation.
And there are a few big sites where you kind of think we know that that location is very rural, it's not got the absorption. We wouldn't contemplate setting up that level of production. But there's more where that kind of model we believe works. Oxford did cut the extreme. It's got an express line into London.
But that's a number that's a step above any of the numbers that it's above the range by a long way that Chris has put on the slide. We're talking about much more bread and butter locations than that generally. And with that, wish to have lunch.
Okay. Good afternoon. Lee Bishop, welcome to the Future Skills Centre and welcome to Whitehill and Boardman and Prince Philip Barracks. The future skill centre here, and we've talked about the lack of skills and everything else in the industry, This is a £3,800,000 investment by Hampshire County Council in a facility to actually start to bring kids through, qualify them with carpentry, bricklaying, and they're starting to extend out. Interestingly today, they're practicing for their GCSE English because it isn't just about building.
They still need all of the other skills around English and maths to make sure that they can read the drawings and the bits that go with the parcels that we've got. So agenda for today. I've got a short period with you, and I'm well aware it's warm and you're running a bit late. So I'm going to talk through what is major developments, what are the 2 projects that we've actually got underway, and more importantly, where our strategy goes for the future and how that ties in with some of the discussions that you've already had this morning. So major developments.
We talked about the planning process and Jenny highlighted for you that planning is starting to bring forward larger and more substantial sites. That puts slightly different pressures on some of the businesses that we have. We operate with short term land teams that are designed to feed the business unit on some of those smaller sites. And the bigger they become, the more complex they are and the nature with which we invest can become different. Those the sites that we tend to look at are those that start to tip towards 1,000 units or more.
And if we go back in time, there never used to be that many of those kinds of sites. Planning is bringing them forward on a more regular basis almost with every authority in the U. K. Trying to centralize their allocations on the sites where they can actually park them as one political vehicle. That involves a lot longer term delivery.
And what we get or we seek is control without commitment. So some of these schemes of 1,000 units are 12 to 20 years in length. And what we look at is how we tie ourselves in that process to get to a point where we derisk for ourselves, the company and also for the landowner who is often staying in the deal with us as a joint venture partner or we're acting with them. So major development works with our business units to actually make sure that we can bring those bigger and more complex sites through, most of those having already been identified and don't have a planning challenge. So there's a planning provenance there that brings those sites through and it's known about.
Otherwise, it fits into our strategic land. So government and this is one of those processes, a government procurement by O2. They bring these sites forward in a process that can take anything from 12 to 18 months. There are various stage gates as we go through from a pre qualifying questionnaire, and they like to change those in the way that we actually do it. We qualify on a lot of those because of the strength of Taylor Wimpey, our financial strength, our ability to show we can deliver.
And that is really important with some of these bigger sites with the discussions we've had around letwin and other things. It will become more a factor in the selection and the choice of the people that we do. Take you through ISOS and actually what they're doing is they're shaping your proposal through dialogue with you through a 12 to 18 month period to make sure that at the end of that period, the answer that you have is something that they will find acceptable. And that will be both with a vendor, but also with a local authority. So that 12 to 18 month period means that myself and my team sit in front of those stakeholders and we make an awful lot of promises about what we can do, how we will shape a market, when we will start to build homes, what the place will look like, how we will add value to the bits that they do.
And when successful and chosen, we don't just move on to another team, because if we move into another team, we lose all of the good work that we've done in that 12 to 18 month period. So we stay with that project, making sure that we maintain that relationship through the period. So a number of my staff have moved on with DIO on the site that we're here today and have remained in the management of that process for the 3 years that we've been here. So we're there at the moment delivering that promise that we previously made in 2014. So we're there running the site with the team and we gradually transitioned that into a business unit.
So the business unit that's on here and is delivering the first part of the site is actually our South Thames business, which Ingrid is one of Ingrid's companies. They are here and they will deliver from their scheme probably about 40 units this year because it's not going to be a full year for us, but we'll actually deliver more as we go through. So what is the real benefit to Taylor Wimpey of a scheme that actually goes through this process? The real delivery for us is actually that shared risk and reward. And in that process, the shared risk and reward, there is effectively an open land value, and the market will determine what goes through in that process.
So in this particular one and that is the bid graph that we submitted for the site that we're on. To give you an idea, we would normally be and I know that might be a bit small for you there, but in your packs, if we'd actually bought that site, we would probably be something like €70,000,000 in red from the day we start. We've not bought that site. We're acting as their agent. We're actually only in to the tune of about £10,000,000 as we've invested in certain bits and pieces as the commitment over 2 years, yeah?
So that enhanced stakeholder relationship has enabled us to drive the delivery and the place making. And for those of you that get on the bus, you'll see that we've actually there's a £30,000,000 road sponsored by Hampshire County Council. There's a £33,000,000 school sponsored by the LEP and Hampshire County Council, which is in construction at the moment and will open in September 2019, yes? So a lot earlier than we would normally do. The HCA have given us a loan for 25,000,000 to start the place making.
So we've laid out 52 hectares of space as we go. And what that does is it drives cash flow. It drives improved return on capital for us because effectively we're leveraging other people's money in this process as well as putting some of our own in. But the big driver here is that we're putting our skill sets in to create the place. And we'll touch on some of the other things that we do with that as we turn.
But what it gives us as a company is long term control of an outlet and I'll use the word outlet, dependent upon how many factories we have on here, okay? So the projects that we've got underway, the first one is Prince Philip Park, which you've driven into today. The first line on the slide is effectively the bid proposal that there would be 100 units coming out of here a year. That 100 units actually includes the Barrett and the David Wilson Park that you've just driven part as well. And the expectation on us this year is that we'll deliver 40 units, and we will actually open for sales this Friday, having been slightly delayed by Carillion who were building our road, So Skanska bless them have finished it for us.
And the road actually officially opens on Thursday. So, our joint venture will pull through 20 units this year, which will be our first output as major developments. The site itself and we've given you a brochure on each of your chairs. Basically the involvement that we've put in about the placemaking and the start is investment not only for our new customers, but also for the local community. This is a site where there were 2,000 squadies.
So the high street consisted of 3 tattoo parlors and a couple of bedding shops and pretty much not anything else. 2 of the tattoo parlors have now closed, because the squadies have moved off. We now have a completely vacant site. And one of the big things that we have to contribute is the top right hand picture is actually the Newtown Center. That Newtown Centre plan and application is in.
It's an £80,000,000 investment and we're looking at selling that. We've gone out to the first key anchors about that and we've got 39 shops to place in the market, which we've talked about retail that being a relative challenge. The local authority are working with us and they've allowed us to put residential above which will balance the investment for us as we go through. And that's the key thing with this site is the engagement with those key stakeholders and the delivery board that meets on a monthly basis helps this site drive it forward for the delivery on a regular basis. In the bottom right, you've got the picture the artist's impression of our show units.
And for those of you on the bus, it won't quite look like that yet because the 1st block of flats are not up, but the show homes are there. As I said, they open Friday. And the 52 hectares of suitable alternative natural green space, which is the 2nd largest in Europe, which will be the 1st largest when we come out, is actually already provided, already open to the public. We had the opening from the mayor. There is a zip wire for those of you that if you do stay around later wants to test.
But we've also put in and opened up a skateboard park. And the skateboard park, we do worry a little bit because we do still see some kids there when we know they should be in school. It is very, very well used in the top picture. So it's an 18 year development. We've got 2,500 homes, 2,400.
We are already in discussions to make that 2,007 through discussions with the local authority and they're encouraging it. They've asked for a call for sites and they've asked us if we can have some more. And I said I don't want more if it's just more in density terms. So they're looking at allocating another part of the site for another 1,000 units. And that's the process that we do for DIO where we act as their development manager.
There's the town center with a quarter of a 1000000 square foot and I've touched on the other parcels. But one of the big deliveries that's here is employment. The town center itself when up and functioning will replace a lot of the jobs that locally went off of the back of the base and the base that was run here. So our challenge is also to find 3,000 jobs, which as we talked through and we'll talk through for those of you that say some of those schemes will drive past that starting to create those jobs in the next few years. Our entitlement under the agreement is effectively for 35%.
So 35% of all of the private housing on-site. We can also have 100% of the affordable housing should we choose to deliver it on our own or with a partner. We have the ability for all of the PRS or build to rent or elderly care if they were market sectors we wanted to go to. So we get choices here that don't necessarily fit our normal market. And I've got a joint venture partner in Dorchester Living that we can start to look at stretching those boundaries and the returns that we get.
And also there's one clause in there, which is 100% of military housing, which we didn't expect to get any, but apparently they might want 150 to 200 homes out of the total. So you'll see my 35% is very liable to start creeping up to 50% and half of the site. The balance with what I do with the rest is effectively we have sold a parcel to 0C as an SME. So we start to enable some of those facilities that go through. We are looking at some custom build and we're looking at some self build.
So here we're using the full agenda of what the government are looking at to say actually we can drive delivery, which would be where Letwin would go in these housing numbers not really caring what the outcome of the mix and the tenure would be. This is one of those sites that can help to drive those numbers through. We are entitled to take the town center and the employment opportunities that are there. We are looking at a presale and we're already in negotiations on that presale as we talk. For the kindness of what we do, we are entitled to some recompense.
We get a gainshare. That's not a discount from land value, but what that means is I work this for 18 years. The more it is worth and the more it becomes worth with the defensive state, I get a percentage of the share that comes from that. Coupled with that, I also get a management charge for all of the staff that are here driving the scheme and the development. The bit that's actually quite interesting is actually the day we signed that deal, there was one clause in the deal, which was a red spot.
And 30 miles around that red spot, which is this site, the DIO can put upon us if we are good at what we do to take another site from them. We've got that first site. The interesting part is it starts as being a full employment provider and it's down on the A3. But we feel it will come good a little later, to provide some more residential. And that relationship through the stakeholder group and the M3 LEP and the County Council, they were pushing for us to take the site.
So it's about relationships that count. Our other project is, Winstanley and York Road. This one is a little easier for me and the team in that we've passed this one to Ingrid and her team in our Central London business. This has our first delivery down for 2019. That might be tight for us now because our joint venture partner, which is Wandsworth, asked us to push back the application for political reasons as in it was time to we would be actually submitting it right in the middle of the elections.
So the delivery here is 2,775 homes across 12 years. We also have an option for a further 500 units, which sits on top of the cross rail station at Clapham Junction. We will rehouse 6 0 8 existing residents and we will decant them into new properties that we build for them. We will also give the opportunity to 132 leaseholders to take either a property from us or to take the CPO offer, which we are backing for Wandsworth Council. And coupled with this, we are providing a 6 lane leisure center pool, library, spa, doctor surgeries, all of the bits that will make that a community as well as laying out a new London Park, which we wrap the whole scheme around.
There's a GDV in there at about €1,100,000,000 and the big part of that scheme is also the delivery of 3 11 PRS units. 300 was the requirement of the bid. We've added an extra 11, so that we can actually contribute to a legacy fund from the rental of those 11 units to make sure that the place that we create is maintained in perpetuity. And that we've agreed with our deal with legal and general that 11 of those units will contribute to the duration. Talked about the extensions.
The other part of what we do is around as well as the place making is about the training. Here, we're starting to see that we've already signed up to the skill center. We are taking, of the first 25, we're taking 10 of the first bricklayers that come out of here. And we will place those skills and the trades that come out of here with the developers of the site. So we've obligated 0 C to take a number of the apprentices that qualify through this.
And that if you like is the policy of actually making sure that the site drives delivery for the whole community not just the benefit of the new people that we move in. And we look at meanwhile uses. So if you saw the boards outside, we've run 80 events on here to keep the community going everything from using the parade square for a drive in cinema to haunted walks through the sang late at night on Halloween. So we're there. We actively engage with our communities and what we do.
And we have a community development officer that does. And you say, is there a sustainable market for what we're doing? The reality is, we see them in 3 tranches. The part of what we've got around garden villages and strategic releases, there are authorities that are actually starting to engage with us and talk to us about will you come and look at the site that we've got? Will you come and talk to us?
Because it's the delivery and some of our schemes that are starting to talk for us. You've got other estate regenerations that are on the blocks as planned, but some of the engagement with the tenants where the rules have started to change may slow some of those down where effectively the Mayor of London is basically insisting that at least 60% of the people vote for the fact that they're going to be regenerated. And then you've got our partnerships where part of the process with my team was to put together those partner panels and we're on transport for London. We're obviously on DIO's radar now for a number of sites that they're starting to bring to the market as well as talking to other bodies like DEFRA about some of the sites that they may bring forward to fund some of the larger infrastructure projects that they've got. So there's a lot there.
Anyone got any questions?
Thank you. I wonder if I can just try and get the right context list. Are we talking that this is a partnership with a set return a set margin? Or is this where you share the upside? Or is this something where you pay a land price as a discount?
What is the actual economics of what you're doing?
This particular deal, we draw down land at open market value at the time we choose to draw it down, Yeah. So we could effectively draw down all of it today and draw a line and say to DIO, we'd like to draw that. But what we've done is we worked through the process. We've actually looked at this as a longer term relationship both here with the local authority and with DIO. So we are actively pulling down land, which gives us about 2 years supply.
Okay? And we'll start to put we're in discussions to pull down the next So we are working with DIO to give them the funds that they need because they have cash requirements. And we fund that through the sale also of the land to 0 C. The margins are respective of the market value at the time we draw it down. So it derisks us for it as we don't if the market were to dip, we don't have to take.
Yes? So it has that balance.
So it's about surety of supply rather than any kind of margin uplift?
Sorry, I didn't
It's about surety of supply of land for you rather than any kind of margin economics.
Yes. If you
Can I just so because it's not simple? And the one sort of absolutely in any site before we look at it is that the not so much the margin, but the return on capital has to be somewhere ahead of what we would consider normal on an ordinary site. And that's largely about the level of return compared to the land risk that we take. So it wouldn't be fair to say that we make no commitment, but our land commitment on these sites is generally significantly less than a normal. But the and this site has all of these.
The returns to us come in 4 components, and they actually all are slightly different. So Liam has touched on them. There is a management fee, which is effectively a cost plus we make a return on our investment of our skills. There is our gainshare on the site where we make partial investment in the infrastructure of the site but don't pay for the land and we get paid, first of all, our capital get back and then we get paid on the land value uplift, whether it's sold to us or sold to a third party. Then there is our right to buy at open market value land off the site where we make a normal return, and that is a fairly normal set of economics.
And the 4th component, which I think we've seen already on sort of the sites we've looked at in major developments, is a knock on impact on relationships not just with DIO, but particularly with Hampshire County Council and local partners that we get a lot of other returns. If you put all the financial parts of returns together, the margin is ahead of our normal margins and return on capital is vastly ahead of the normal margin of normal sort of returns. Each site though has similar characteristics and they could have any kind of 2 or 3 out of those sort of 4 components. This was is unusual because it's got all of them. And so you can't really break it down.
It's not just about security of supply by any means. It wouldn't make sense for the amount of effort. It's about the scale of the returns on the different elements. And it's about actually having a stake in the site that you're not having to pay out the whole land value upfront or be committed. So it's not just our land creditor that you have to pay out at any future time.
Sorry just the gain share comes after 12 years 18 years. End of sight or do you part accounts?
At the moment, we're in discussion because we've sold the 1st parcel. In theory, there is a debate that the game share can start to be drawn against the figures that we put down. But we are quite cautious, and we've not pushed for that first parcel yet. We are actually plowing some of that money back into the
scheme.
I like it when it's warm. Any questions?
Just before I sort of open
up for Q
and A. So I had 3 bits that I was kind of going to cover. First of all, just talk for a couple of minutes and sort of almost touched on it in a bit and answering Glynis' question about why we brought you here and why we think wage developments is worth talking about in the context of the strategy that we have been talking about today. The second is to open up again for and A sort of for Chris and for Jenny and for myself with anything from the day that you want to pick up. And then I'll just round off with a few sort of closing comments on the strategy, and then we'll have the sort of site visit.
We brought you here because it gives you particularly if you do go on the bus to get a sense of it, it gives you a scale of when we say a super large site, how large and how complex they are. And I think that's important because that sense that we've been trying to get across all day that you can't just take one outlet number and multiply it by one sales rate. There are very, very different areas to this site. There will be very, very different products on this site. There will be very, very different characteristics.
And this is probably the extreme end, but it gives you a sense of the kind of thing we're talking about on some of the large sites that are now sort of normal. I think it also gives you a sense of why 3 or 4 years ago, when you see the number of opportunities that come up, our normal businesses can't cope with the procurement process within these sites. They also can't cope very well with the early stage delivery. The later stage delivery phase by phase is meat and drink for them. So actually, what we're finding is the level of competition for these kind of sites is very thin and quite different to anything else that we do.
And that brings quite a few opportunities. And as Lia has touched on and I sort of reinforced, particularly brings opportunities where we get that right with local authorities and with partners who then see how we work and want to repeat it elsewhere. The last thing I'd say on major developments is neither of the sites that we're talking about are in our land bank numbers. We're still sort of working through sort of major doubts. We see this as sort of upside sort of options for the future.
Sometimes, if you look at the 35% that we have the right to take, we haven't included that because we don't have we have the right. We don't have the requirement to take any of it. It gives us choices that we haven't historically had. And what we're seeing is a political climate where pretty much whatever the direction is, more of these large complex sites with the need to manage, particularly in the Southeast, a complex set of skills are going to be an important part of the market. So we think it's an important development area for the future.
As I said, I then sort of wanted just to give you a chance to ask any more questions more generally about the day than necessarily about either Boardman or the strategy. But if question. Take any questions as well as me.
Just a general question around the sort of new strategy that you've laid out to 2023, which is very clear. Will you be updating management incentives around reaching the strategy targets? And how will that look?
I think it's highly likely that we will. We're in the early stages of that conversation. We've had a view and a belief that the right thing to do is set out the strategy, sort of test where people kind of buy into that and where you see the drivers and then look at incentives on the back of that rather than saying sort of the 2 are embedded. I don't see us changing in a massive way quantum. It's more about making sure, particularly on some of the long term elements, that our incentive structures tie into that.
We're always conscious if you take the customer facing elements, for instance, we're always conscious of the sensitivity about having too big a proportion weighted that way. But I think people have bought into by people, I mean investors have bought into where we've been over the last 2 or 3 years with level of customer service kind of measurement that we've got and how that sort of operated. So I guess it's a slightly unsatisfying answer. We will be back. But I don't think you'll be you'll feel that what we're proposing is anything particularly difficult.
It will just try and tie management to the priorities that we're setting out for investors.
Long term incentives still very important despite the negative publicity surrounding
some of them in the sector?
No, no, definitely. And I think if anything, we would like to go longer term rather than the other way around. I mean, I have a belief and the board is no different in this that good businesses are run for the long term and some of the worst decisions are taken by a pure short term focus just because there's one sort of extreme example, shall we say, of long term incentives that only have one measure which in itself is always going to be a problem doesn't mean that long term incentives are then a bad thing. So it's about making sure that we can be clear on the measures and getting that balance right between sort of them being challenging and realistic. The biggest challenge, I think, is working out what's the right performance measure, whatever the metric was the right performance measure if the environment changes.
And it's sort of clearly management should sort of live and die with investors, but it's making sure you don't have with a scheme that's either too easy or ridiculous sort of. And the longer term it is, the harder that is to get right. So that something that adjusts to some degree to competitive performance sort of helps somewhat. But I am sure where we get to, there will be some components you recognize as fairly traditional and some new things where we think, absolutely, this is a good way of testing some of the things that we're setting out. But I think and I hope nobody would disagree with this.
I think we've always been pretty good at setting them out and explaining them, and we haven't tended to have too much then concern with things that we want to do. Any others? We've got one from Kevin in the middle at the back.
Just coming back actually on the division. One of the things you said you required to go forward in one of these projects was actually an element of control over the life of the SCIM. If you take the two examples of what you're involved in, to what extent do you or how do you control which other developers come in, who the land sold to, what do you get a say in all that sort of thing?
We have a very honest discussion with DIO about how we're managing it. We have a very honest discussion about the investment that we have placed in the site on their behalf. And we make sure that actually a part of the submission is around the quality and the place of the delivery of the scheme. So, 0C were challenged to come forward with the scheme as were 15 others. Not all of them passed muster on that submission.
So in essence, what we're saying is we want you to maintain our quality. And if you don't, you're not suitable for the scheme. And DIO have accepted that.
Capacity wise, if the team has to stay with the project for 3 to 5 years, how many of these developments will it be possible for the group to be doing in 3 years' time, say?
I think each we can set up a new team for each scheme. So to a certain extent, it's rolling through these businesses. And as he said, a number of Hibbett's early team are now kind of transferred full time onto this project. And we see that as being a model for the way that we go forward. So people spend a time on the procurement process, identify with a particular site.
And over 12 to 18 months, they may be working on 2 or 3 sites. And then part of that team will then be the initial setup to get that team running. So I think the capacity it's a combination of what's the level of marketplace opportunity, what's our penetration and then making sure we resource it. We feel at any one point in time over the next few years sort of you're talking about 6 or 7 schemes. I think longer term there's more potential than that, but it's in that sort of order.
And then go on.
I mean there's one other part to that, Kevin. We are where we're bidding for 1 at the moment with Maidenhead. We're actually bringing the business unit in a lot earlier, so that they're seeing the people that will also be involved. But we've also brought through Charlie, one of the guys at the back who's leading the bid, who joined my team for a year may well stay with that project as we go forward. So it's other I get in some respects people that get to join my team and spend some time with me learn different things, but then go back to different parts of our business, if you like, slightly different for the challenge that a bigger project puts in front of them?
Every scheme is slightly different. I mean some are closer to a traditional strategic land sort of type scheme with a few bells and whistles. And so it needs a bit of support on the procurement process but less of a full on involvement. Some are sort of full complex schemes that need long term support from Lee's team. But if you take just one of the 3 kind of closing kind of pillars of opportunity that Lee talked about on Garden Villages, it's long been a frustration that whenever policy changed and you've got opportunities, we just if our local team didn't have to happen to have the skills, we've really got nothing that we can put in to say, no, actually this is an opportunity.
There's a business nationally we should take, but our local team don't have the skills and the attitude. And we've tried different things. This feels like it works because we put more resource in upfront than the early schemes needed and starts to get stretched when you will start winning some. Okay. James, you're going to head to the front to the well.
Thanks. And mine was more of a
personal question actually. Just I
think I'm right in saying you're the longest
No, I normally dress like this. This is actually quite smart. I don't appreciate the digs or Kilo.
I think I'm right. So you're the longest serving Chief Exec in the sector.
I think I probably have been for quite a while actually. Yes. So but you certainly
seem very enthusiastic and committed today. But if
a shareholder was to ask, as best you can plan the
next few years, is it your intention at least to see out the 5 years to 2023?
It is. I mean, we wouldn't be I wouldn't be stood here setting out this strategy today if I was buggering off in 12 or 18 months' time. I don't have a fixed time line. It's a conversation the Board and I talk about. And sort of the changes that we made to bring more operational skills, sort of a more background knowledge and skills of the business with Chris and with Jenny on to the Board sort of a couple of weeks ago are about making sure the Board's got access to a much broader range of skills.
So it's not too dependent on one individual. But that's not because we start the clock ticking. It just feels like the right thing to do longer term. So if I'd have gone through the last 18 months of planning on this in all honesty and decided actually what came out the other end of it was doing a bit more of the same, I probably say somebody else should be doing that because it's time to sort of move over. But as long as I can keep saying, well, I've got that right and I've got that wrong and I'm prepared to change and challenge the things that I've got wrong, then I think it's I've still got some legs, as long as I'm allowed not to wear a tie.
Good. I think that's probably the end of the questions. Just a couple of closing remarks and not a lot. I'm not going to repeat sort of all of the messages from this morning. I would just go back to what we're trying to do.
What really matters to us is set out the direction for the business for quite a long time for the next 10 years or so. We're not trying to call the market for the next 10 years or so. We're also not deeply worried about what happens in the market in the next couple. We always know that from an investor point of view and that therefore, for most in the room, the focus is always going to be on what we can put in numbers. And the shorter term, the better.
And the closer related it is to dividends, the better. I would just ask you to as we go through the next 2 or 3 years of sort of reporting and presentations to sort of pick up some of the themes that we've talked about today that are perhaps a bit longer term and may seem a bit softer. So I think as we look back in 5 years' time, it will be those that have come through rather than necessarily what we announced on dividends today, recognizing the sort of short term world we all live in. That's not what immediately kind of hits the radar screens, but it is the thing. What we're talking about with customers, what we're talking about building more capacity to do it right in the long term, I think, makes a big difference in the business.
I think our business is ready for that. I don't think everybody else in the sector is. And I think those are the things that we'll look back at and think have made a real difference in a few years' time. But thank you for all of your time today and particularly the depth and the interest and the questions. We do have a bus tour.
I think we could accommodate everybody sort of who wants to go, but we also have buses that can either go back to the station or to the hotel. If you go on the bus tour, it's coming it's bringing you back here. And then same thing, we can get you to the station. I would recommend that if you can, you take a look around because it does, as I say, just give you a sense of when we say a big site and that they have complex constraints, but also a lot of opportunities. Seeing it in reality will give you a far better flavor than seeing a one outlet number on the spreadsheet.
And bear in mind that this will look like it's one outlet. Thanks very much.