Bellway PLC
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Bellway PLC
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Well, good morning. Thank you for joining us. A reasonable or a better turnout than we'd hoped. So thank you, and welcome to Bellway's Half Year Results. As always, I'm sure there will be keen interest in current trading and outlook. But first, I'll draw your attention to a few key highlights. Housing completions were slightly ahead of last year with a new record volume of just under 5,700 homes.
And notwithstanding current inflationary pressures, underlying PBT was down by less than 5% at £312 million. Interim dividend is maintained at 45p per share. And reflecting our responsible approach to capital allocation, we've announced a share buyback program of £100 million.
Market conditions in the first six months have been challenging. And given that backdrop, we've focused our attention on cash generation and cost control, unwinding the order book, accelerating the delivery of affordable homes and closely managing our cost base to help mitigate inflation. And it's these actions that have led to a strong first half performance.
Now despite a more modest sales rate, particularly through the autumn period, the order book is still strong, and the business remains in a healthy shape. We have got depth to our land bank, scope to increase outlet numbers, cash in the bank a strong track record on delivery and the ability to promptly return to growth when the time is right.
And it's with that confidence in the business, we can return excess cash to our shareholders through a buyback. And Keith will better articulate our capital allocation strategy. But as usual, our approach is a very balanced one.
Now for our first half results with Keith.
Okay. Thanks, Jason. Good morning all. So the financial performance for the first half year was solid, and it was driven by the strong order book. It has helped us to deliver record volume and a record average selling price. And as already mentioned by Jason, underlying profit before tax was £312 million, which is a slight reduction compared to last half year's peak with this driven by margin pressures.
Jason also mentioned in his introduction, our priorities to build out the order book and to accelerate the production of social housing plots. And because of this plan and despite the weaker trading conditions, housing revenue still rose by 1.6% to over £1.8 billion. And this was achieved even though production constraints were still evident across the sector, particularly at the start of the period. In addition, this approach has resulted in social housing completions, rising to 21% of total volume.
The ongoing rephasing of construction programs means that the trends towards affordable housing will gather pace and it will therefore represent more than 25% of volume output for the full year. On that higher rate of social homes will also dilute the FY '23 average selling price, which, as I said, last October is likely to be around £300,000. While the market has been challenging, demand in certain parts of the country has been stronger than others.
For example, our Manchester, Northern Home Counties and East Midlands divisions have all shown resilience benefiting from their offering affordably priced homes in high-demand areas. Our second brand, Ashberry, grew to 11% of completions. And it is proving to be valuable in a slower market, where planning slow-constraints new outlet openings. Where appropriate, Ashberry allows us to offer two selling outlets on larger sites and this provides greater choice to customers and helps to stimulate sales rates.
Completions in London reduced slightly to 6% of the total. And this reflects lower land investment in earlier years, when we sought to move away from higher-density London schemes given lower demand, affordability constraints and their dependency on Help to Buy. Underlying gross profit was close to last half year at £389 million, and there was an 80 basis point reduction in the gross margin to 21.5%. The prices achieved on completions in the period largely reflect those included in the order book at the start of the year.
But going forward, we expect an increased use of sales incentives. And in addition, build costs are still rising. The combination of these factors means that there will be ongoing gross margin compression for the remainder of this financial year and further pressure into FY '24. The administrative expense increased to £71 million, in part a reflection of the additional costs of our recently established build in safety division.
There are also inflationary challenges with upward pressure on employee-related costs given the continued demand for skilled resources. We're keen to preserve the integrity of our divisional structure so that we don't damage our longer-term prospects and to ensure that we are well prepared in the event of a market recovery. But at the same time, we're keeping a keen focus on cost control. And in that regard, there has been a moratorium on new recruitment.
We have commenced a workforce planning program. And the payout on employee incentive schemes, which can form a large component of remuneration in the household and sector, is likely to be lower than last year. And as a result of these actions, I now expect the full year administrative expense to be around £145 million, which is below previous guidance of over £150 million. After considering overheads, the first half underlying operating margin was 17.6%, and this will moderate for the full year given the predicted reduction in gross margin.
In addition, the administrative overheads will not be absorbed as efficiently due to the higher weighting of housing revenue in the first half. It's too early and uncertain to go to an operating margin for FY '24, but the trend for margin compression will continue, and this will be more pronounced because of lower volume output. That said, whilst there is likely to be near-term margin compression, we should not be too downbeat when looking out over the medium term.
In that vein, mortgage rates have stabilized. Inflation is forecast to moderate. Employment levels are high, and wage rises are in part offsetting rising living costs. All this means that new homes remain affordable in a historical context. And coupled with structural underlying demand, there is a strong foundation for medium-term margin recovery once this period of uncertainty passes. Moving on, joint venture profit was very modest in H1.
But for the full year, it is likely to be a small loss. The underlying interest cost remained in line with last half year at £6 million. And for the full year, I now expect an underlying net finance cost of around £13 million. And this is lower than previously expected, mainly because of higher interest rates on cash deposits. The effective tax rate was 24.8%, and it should be close to this for the full year, before rising to just below 29% in FY '24.
As you know, we signed the government's building safety pledge in April last year. And following this, we have recently signed the binding self remediation terms contract. The consequences of not doing so would eventually include a future prohibition on new planning consents and the withholding of build and control approvals. While some of the terms of the SRT are onerous, particularly in terms of the reporting requirements. Fundamentally and importantly, it does not change our financial liability.
And on a positive note, the SRT clarifies the required standard of remediation or at least it does on paper, but the practical interpretation of these standards by the wider industry will no doubt continue to evolve over the coming years. Aside from the SRT and in the usual manner, we've updated our cost estimates in relation to building safety. This has resulted in an adjusted charge of £6 million in the income statement.
The charge includes a £3 million adjusted finance expense, which relates to the unwinding of the discount on the provision. And because of higher build rates, this will increase to around £11 million for the full year. The remaining charge also of £3 million is recognized through cost of sales. And it is stated net and therefore, after the benefit of £50 million of recoveries. These relate to one-off settlements across several sites, which we have been working on for several years.
Offsetting this is an expense of £53 million where we've taken the opportunity to prudently revise cost estimates on existing schemes. And we've also considered a widening scope of works beyond just the external envelope. The requirement for building owners to undertake regular fire risk assessments should be that fewer new issues are likely to be discovered in the future. Importantly, our provision also includes an allowance for as yet underscored problems.
As ever, our approach is prudent. It's considered, and our focus is to get on with the remediation work. The balance sheet is included for reference. I'll talk through the most material items. And as you know, we curtailed land buying activity back in autumn, but our total owned and controlled land bank remains similar in size to this time last year at around 58,000 plots. Planning is still frustratingly slow, but the proportion of plots with detailed planning permission is gradually beginning to increase.
And at the same time, we continue our focus on longer-term strategic plots, securing interests for a modest initial capital outlay. Land prices are then generally agreed based on market conditions at the time of acquisition, which can be some years down the line. Overall, our land bank is strong, and it comprises some 100,000 plots. And this means we can remain very selective, proceeding only with contracts that offer compelling financial returns. In terms of work in progress, the balance has increased to £1.6 billion, in part reflecting a greater weighting of plots towards later build stages.
But in addition, we've also invested in site infrastructure and limited early-stage foundation work in preparation for site openings later this calendar year. We will retain strong control of work in progress to ensure continued balance sheet resilience. Our investment in part exchange properties is still low at only £11 million. And part exchange has to be used carefully as it can be costly, and it also ties up capital.
That said, we have significant balance sheet capacity to invest more in PX, and this will help overcome some of the problems we face in part exchange, which can be a cause of a delay and in some instances, cancellations. Our cash position remains very strong. We ended the period with net cash of £293 million. And the average month end cost position over the past six months was close to this at £253 million. This demonstrates the strength of the group throughout the period, and I also expect that we will remain in an average cash position throughout H2 despite the lower year-on-year sales rates and the share buyback program.
Land creditors, we remained low at £372 million. And adjusted gearing inclusive of land creditors was only 2%. Our balance sheet provides resilient, strategic flexibility capacity to invest in land and the ability to return cash to shareholders. And in that regard, we are maintaining the interim dividend at 45p per share. And subject to market conditions and shareholder approval, we also expect to maintain the final dividend in line with last year at 95p per share.
We've previously said that we expect the dividend cover to reduce to around 2.5x underlying earnings by July 2024, and I still think this remains a sensible long-term target. In addition, if there is a year-on-year reduction in earnings in FY '23 and in FY '24, our balance sheet provides the scope to temporarily reduce cover below 2.5x. Further to the dividend, and as already mentioned, we are today announcing a £100 million share buyback program with an initial £50 million tranche to commence imminently.
The rationale is that volume is likely to reduce next year, and our land bank is strong. And in this context, we believe we have surplus capital, which will generate more value if it is returned to shareholders. Our capital allocation strategy is a balanced one. Maintain a healthy dividend, maintain the ability to selectively invest in land and complement that approach with a share buyback. Briefly, you will recall that carbon reduction is a cornerstone of our Better with Bellway sustainability strategy.
And in respect of our Scope 3 targets, we continue to work with the supply chain to look at alternative building materials. We are also undertaking several research and development projects including trial sites and in order to design and test solutions to reduce regulated Scope 3 emissions in line with the requirements of the future home standard. Jason will discuss progress in relation to the building regulations.
But the flagship of these research projects is Energy House 2 at the University of Salford. Here, we have constructed a Bellway future home inside a temperature-controlled chamber, which can mimic environmental conditions experienced by 95% of the world's population. We are testing the energy and the carbon efficiency of a range of technologies, including air source heat pumps, infrared panels, mechanical heat recovery and enhancements to the fabric of the builder.
It can get quite technical, but it is an interesting project, and we will look forward to welcoming many of you to our Energy House project in May in conjunction with our research partners later this year. So to summarize today's financial part of the presentation. We're still on track to deliver around 11,000 homes this year at an overall average selling price of around £300,000.
There will be a further moderation in the underlying operating margin from the 17.6% achieved in the first half. We've maintained the interim dividend and also returning £100 million of surplus capital to shareholders through a buyback program. And finally, the balance sheet is solid. It provides continued resilience, strategic flexibility and the capacity to invest in land when the timing is right.
I'll now pass it back over to Jason.
Thanks, Keith. I'll start with trading. The trading period from the first of August through to January is probably best described through the first slide. In the first nine weeks, private reservations were lower than the previous year by 27% as mortgage rates had already started to rise, and we felt the first effects of the September budget. The subsequent three months through to December, private reservations fell by 60%.
And then you can start to see the recovery building in January. Overall, in the period, total reservations were down by 1/3, with private reservations down by 44%. Cancellations averaged 20% in the first half. But since the first of February, that has reduced to around 15%. Now before I go on to current trading, I just want to take a quick look at the mortgage market.
Interest rates or the mortgage market has now started to settle, with 75% LTV rates, now at least 1% lower than their peak last year. And those with bigger deposits can readily access a five-year fixed rate now at below 4%. However, if you look at the 95% LTV rates, product availability is still modest. And with the end of Help to Buy, there's clearly a gap in mortgage finance for first-time buyers. That said, underlying demand is healthy, customers are adapting to the new mortgage rates and trading is certainly improving.
And with regard to current trading, in the first six weeks since the first of February, it has been a gradual week-on-week improvement in private reservations. Our average private sales rate in that period was 135 homes per week, still down by 40%, but that's measured against a very strong comparator period. And usually, as you know, we report sales in absolute numbers as opposed to a rate per outlet. But to give you some context, and this is important, our most recent selling weeks in March have consistently delivered of rate per outlet of 0.6.
House price inflation has all but disappeared. And whilst we've seen very little pressure on list or house prices, the cost of selling incentives has grown from just over 1% to around 3% and higher on some targeted sites. The order book is understandably lower at around 5,000 homes, but still strong with a value of £1.6 billion. And notably, we are 95% sold for the current year.
Turning now to land, you may recall our appetite and strategy for land investment back in the summer of 2020 was always to grow outlet numbers to mitigate the loss of Help to Buy. That approach is still as important as ever as we now navigate a softer selling environment. And that environment may very well continue through to the next general election. And outlet openings are always difficult to forecast, but even more so with the current planning system. Although we do expect outlet numbers to increase in the summer of this year, and that will help support sales volumes in softer trading conditions.
Now if I could refer you to the land bank chart. Our owned and controlled land bank is slightly ahead at 58,000 plots and represents around five years of supply. And you can see from the slide where we were front-footed with investment back in FY '21 during the early phase of the pandemic. And this resulted in our owned and controlled land bank growing by 18%. Today, we only invest where we see compelling land opportunities.
And that strength at land bank allows us to be very selective. In the past six months, we have contracted on a further 2,400 plots, of which about half of those have walk away clauses. And by that, I mean, it's at Bellway's discretion whether we complete on the acquisition. Now where our appetite is greater is within strategic land.
We've continued to invest in our strat land teams and also made a further corporate acquisition of a strat land company, which holds 52 sites and around 6,000 plots. And interestingly, over the past two years, you will have seen the strategic tier of our land bank grow by 50% to 42,000 plots providing Bellway with a solid footing for longer-term growth.
Now turning to production. Build cost inflation was approaching 10% in the first half. And whilst costs are now coming down, they're not falling fast enough. Inflationary pressures are still stubborn in parts. Some suppliers and subcontractors are still -- are willing to offer us discounts for visibility of workload into '23 and '24. And some have extended fixed price periods.
However, cost increases for plasterboard, for roof tiles, for windows are all still persistent with suppliers demanding increases of up to 10%. We are certainly in a period of -- a transition period of falling costs, but it's a little slower than I'd hoped. And with regard to the availability of labor and materials, after two years of strong demand, those pressures have started to ease.
And I don't envisage any production problems in the short term. Now given the stubborn inflation pressures, we continue to look for further efficiencies to mitigate margin pressures. Our Artisan standard house-type range is now going through its first review in order to accommodate the interim building rigs in June of this year.
And we're taking the opportunity to value engineer some design elements following the experience we've gained across the past two to three years, items such as ground drainage, proprietary retaining wall systems and better roof designs to accommodate new PV panels.
Artisan is now plotted on 95% of all planning applications and will account for over 40% of completions this year. And Keith has already mentioned Energy House. But out in the field, we've got numerous trial sites across the U.K. to meet future home standards and determine which products are both practical and cost-effective for both our customers and their site teams.
Operationally, the last six months have been challenging, principally because of gaps in the supply chain. And as those pressures start to abate, the focus for our teams is clear. Build teams are charged with closely controlling WIP and accelerating the delivery of affordable homes. Commercial teams are faced with the challenge of driving down costs. Land teams are focused on planning to drive outlet growth.
And our sales teams are being retrained not only to rediscover the art of selling, but also to be conversant with incentive campaigns and the new building regulations. And just one final part. Once Keith outlined our approach to admin savings, I am keen to preserve the long-term health of the business. And I still plan to continue with our young person's intake program in September of this year. It's worth just spending a few minutes on customer first, our Better with Bellway approach.
We have again been recognized as a five-star homebuilder for the seventh consecutive year. But as I mentioned earlier, it's been a tough six months, and our eight-week survey score has moderated from a high of 94%. And that's a product of extended build period and pressures from the supply chain. We have a range of initiatives underway for the year ahead. And one that we recently launched is our Meet the Builder approach. Adjacent to all of our future show homes will be a partly constructive view house where customers will be able to see the internal workings of a house to gain an insight into the build process and ask questions to our site teams.
And that the slide shows a typical example from our East Midlands division. In addition to Meet the Builder days, we're also providing customers with information on sustainability, energy saving benefits and a guide to anticipated running costs in our new homes. And all these measures are designed to underpin confidence in the quality of a Bellway home. Now before I finish off with outlook, I just wanted to mention the housing -- the CMA housing market study.
The scope is quite far reaching and goes beyond the perennial investigations into land banking. The study is designed to better understand industry practices such as land acquisition, build-out rates and the sales environment. The results are planned for early 2024. And I would hope that the findings will highlight the challenges faced by both small and large house builders and will have a positive effect on future housing policy.
And finally, outlook, we're 95% sold. So you can expect a volume of around 11,000 homes. In October, our prelims, we'll be in a better place to offer guidance for FY '24, though it's clear that volume output will be notably lower than 23%. And given the strength of our balance sheet, we plan to maintain our dividend for the full year whilst retaining the ability to reenter the land market when the timing is right. Thank you.
Keith and I are now happy to take questions.
Ami Galla from Citi. Just a few questions from me. The first one was really on the volume side of the story. Are you doing anything differently to increase volume reservations in the business? Are you looking at bulk deals? Are you aggressively increasing your contracts with housing associations and local authorities? Maybe into 2024?
The second one on -- I know you're not talking of FY '24 guidance, but would -- is there scope for further cost mitigation measures as we think about the overheads in 2024 when volumes do come down? And the last one, really on the land market, can you give us some commentary or color in terms of what's happening to prices in the land market?
You do two. I'll do volume, Ami. There isn't one big hit in terms of volume. But you've heard us talk about accelerating the delivery of affordable homes that we can. And in addition to that, we do a small number of bulk deals of housing associations, whether it's HAs or the MOD, but I wouldn't do them on scale. And on top of that, we have got incentives campaigns that we're running at the moment, we'll run a new one across Easter to promote the sale of private homes, too.
So it's a balanced approach, as you'd probably expect me to say. I don't want to start heavily discounting properties when the market is recovering. I feel quite confident about the market going forward. So that's where we are in volume. And there's a limit to what you can do to '24 volumes because your order book has been affected by that period in '22. So I think we're faced with that, and we're looking beyond that period.
And I'll finish off with the land market. And it's an interesting question because I'm sure someone wants me to say that land prices are coming down or -- the truth is we have had some discounts on existing contracts that are conditional, yes, and land that we've bought. And I'd say discounts of 10% on occasion a little bit more. But in many cases, landowners and land sellers are sitting on their hands and waiting for the market to recover before they bring land to the market.
So there's a bit of wait-and-see approach at the moment. So we certainly see if there's a strong location in a robust residential area, good margin, I'm talking high 20s. So you'd buy a little bit higher than you used to, just in case that incentive line gets a bit bigger, so you can accommodate it. We'd still look at buying, but there's not huge numbers of opportunities on the market.
And then on costs, as we go into next year, our intention isn't at the moment to cut more deeply. So sadly, we've already lost around or we'll be losing around about 100 people to our workforce planning program, and that's we brought into the business when we were planning to grow volumes above the 11,000. At the moment, our thoughts how we want to maintain the divisional structure, and we want to maintain that call with people who are still in the business, and that will help us to recover more quickly and hopefully get back onto a trajectory of growth in due cost.
And I think we're very mindful of the lessons we learned in the GFC where we cut deep and we cut hard, and it takes you a long, long time to recover. So currently, as you go into FY '24 and based on how the market seems to be recovering, the overheads will go by inflation again as you go into the next financial year.
And just one thing to add because I have this debate with the teams. Our business has got a decent land bank. We're actually growing outlets. So my outlets are growing. So I need more people to sell homes, more people to build homes on a wider -- there's a limit to how much you can cut on overhead.
Aynsley Lammin from Investec. Just two, please. First of all, on the build cost inflation, you said obviously it's stickier than you may have expected. Just any more color there where you're seeing prices come off and which areas are sticky? And for calendar '23, what would you expect the run rate to be from 10% to 5% or -- just interested in your view there.
And then second question, just on the dividend, obviously, maintain the 140p this year. Is it your intention to maintain the 140p for FY '24? And obviously, consensus expects about 40% fall in profits. If that actually happens, would you still pay that intent to pay that 140p, for example?
I'll do inflation, and it's best guess. I was hoping Aynsley the cost inflation will be coming on faster than it is. But certainly, it's our ambition. If we were at 9% in the first half, we'd want to see that halved by the summer, down to 4.5%. And that's certainly a target but that's just stubborn -- you hear it in the wider market beyond house building, and we're experiencing it. They're just stubborn parts whether it's particular materials or certain parts of the country that are a bit resistant. So our target is probably between 4% and 5% for the summer.
And on the dividend in FY '24, it's a fair question. I would start by saying clearly the decision will be taken at the time, and we're not giving prescriptive guidance to FY '24 at this stage. But what I would say is we've got the capacity to maintain the dividend in FY '24, but we expect to be the FY '23 level and what was the FY '22 level at £1.40 per share. We believe the balance sheet is resilient enough to withstand us, notwithstanding the likely reduction in earnings in FY '24 and the fall in volume. So we believe, look, take into account all of the things, buybacks, land and all the rest of it that we've got the capacity to do that.
Jon Bell from Deutsche Bank. Two from me. One of your peers is rolling out air source heat pumps fairly aggressively on the premise that its buyers are asking for them. Are you hearing the same thing from your buyers? And where are you up to on that journey? And the second one, I just wonder whether you could comment on London market conditions. I know you called out a couple of the stronger regions. But perhaps you could just comment there?
John, on the air source heat pumps, every one of our divisions, all 22 of them will be trialing sites through '24. But we don't plan to bring or air sourcing heat pumps in on scale ahead of that. So our divisions will be learning from 2024, so will our supply chain so we can start training up the workforce. So, we're sort of a year ahead, but everyone is going to get that training. In terms of -- sorry, your second point was...
Market conditions in London.
Well, I was only saying that this morning on London, there was a lot of commentary last year that London was suffering. And it was overpriced. I mean our exposure to London is what I call affordable London, commuter belt, edge of London. And two of our bigger developments currently on sale Barking, Bexleyheath where we've got big volumes are two of the fastest selling sites in the group, so that's a price point of £350,000.
I couldn't comment above that, Jon. But certainly, that space even first-time buyers, Jon, that is still moving. And we've got new developments coming out. Stratford, Greenwich, Croydon, somewhere else that escapes me. But -- so we've got -- we're carrying on in that affordable space. So I'm quite confident with London at the moment.
I was just going to the air sourcing heat pumps, not to labor the point, but if you come to our Energy House in Southport, you see these things are quite big. They take quite a bit of room. So it's not always obvious where they're going to go on a plot layout. And if you've got a certain design of homes, it might lend itself to us. So there's one issue; two, they're not necessarily the acquired this thing in the world. So there's a customer issue to think about that.
And thirdly, whilst there's just carbon, they can't certainly energy costs now are more expensive to run than a gas power. So we're not -- that's why we're having all the trials and trying to get through there before we say that to roll it out everywhere. It's not necessarily an easy solution. It's probably one of the more complicated bits of the future home standard is how you deal with those.
Will Jones from Redburn. Three, please. First, if you can just help us with how to think about gross margin evolution as volumes decline into FY '24? I think you talked about site duration impacts on your margin, and we had that back in 2020. But have you kind of taken that hit, if you like, within the first half margin? Or should we think about it continuing to be a factor through '24? The second is just really how -- any comments on how price sensitive you think the market is at the moment either way?
I mean you talked regions where the market is good. I mean is there any scope there to nudge prices ahead by 1% to 2%? Or is that just off the table? And then finally, just on outlet openings, are you proceeding with everything you can planning wise at the moment? Or are there something you're holding back tactically?
Do you want to start? And I'll...
Yes. So on gross margin, I mean, it's a -- we're not going to be as prescriptive as what we would normally be on gross margin because there are so many moving parts. To the extent where we've experienced slower sales rates to date, and that's how to knock on impact on the duration of sites. We've put those costs into our valuations and a typical slight costs £25,000 to £60,000 per month to run depending on how big it is. So we've reflected those. Now to the extent that sales rates revert to where they were in the autumn again.
That would be another hit to take, but it's broadly about right in terms of those extended site durations at the moment. You've then got an environment where you've got flat house prices at best, increasing incentives and rising build costs. And not all of that can be factored in. I don't know what build costs are going to be in five years' time. So that's where the threat is.
If you look at the anticipated margin in our order book, that's probably between 20% and 21%. And people think that's fixed. It's not. That's an expectation as to what we've delivered. But of course, all of those sites still have live valuations. And if our terms have changed, that can go one way or the other. So lots of different moving parts, I guess, and it's hard to be more precise than that.
I would say, look, on the upside, sales rates are gathering pace, headline prices remain firm. Cost incision seems to be coming down. But there's obviously those downside risks, which means it's slightly fall in FY '24.
I think on prices, Will, you're right, it's price-sensitive, but we're sort of in a market now where people want to deal they expect to deal. That's the environment we're in. So, I would probably expect wouldn't be surprised if that incentive line grows a little bit more, mentioning to Glynis just before the start, incentives in other word for a discount, isn't it?
That is a discount to a house price. So I would expect there to be a bit more pressure. But that's not a U.K.-wide thing. And I guess I said in the presentation, house price inflation is a little bit disappeared. But there are some robust selling places where we're not using incentives at all, Will, places like the Northwest of England are very robust.
So I'd suggest your incentive line may grow in the Southwest, where it's a bit quieter or the Southeast, where prices are very full. But in other places, parts of the U.K., that incentive line will you might even see a little bit of inflation. That wouldn't surprise us, but it's -- it will be geography led as you move into '23 and '24. And with regard to outlets, I would say I've got one site that I'm holding back, and that's because someone wants me to put an external staircase on it, Will, not because I -- are not opening it. We are flat out as a business. All our land teams are working on the planning environment to aggressively open outlets across the U.K. So no, we're not holding back.
Chris Millington at Numis. I just wondered if you could give us a bit of a reference point to the sales rates in March this year back to pre-COVID trends. Obviously, we've had two quite distorted years. And one of your competitors referred to kind of tracking back towards '19. I just wondered if you could comment around that point first of all?
Yes. I think you may be referring to Barratt, which was an interesting statistic. But we haven't always, as you well know, Chris, measured our rate in rate per outlet. So as our guide as opposed to exact science, but certainly, we think that pre-COVID, our rate per outlet was around 0.75. We're currently at a good 0.6. So, we think the market is very healthy at the moment compared to where we've been. So we see that as a real positive.
Okay. Next one is really just about distribution of margins. Keith, I think you might have mentioned it a year ago about the distribution across the land bank. I just wonder if there's been any material change. Obviously, there's been a bit of compression at the gross margin level. So just give us it.
No, because our land bank -- so I mean it's probably worth explaining, we've been proactive in the land market. And initially that was driven in the months immediately after COVID. And if you remember, we were coming out of a period where you had flat house prices, rising costs, particularly in London, and then you had COVID, which extended everything. So all of those additions to our land bank have been value enhancing, they've strengthened the margin in the land bank overall.
So we started with a robust sort of at least 23% in that top tier a land bank with DPP. Now yes, I'm sure there's some compression on that as a result of what house prices have done in build costs, maybe 1%, 2% or so over the past six months. That's sort of an educated guess rather than a precise science. But you're starting from a higher position than what we would have otherwise been. So we would always ship for that compression no matter what we've done.
And then in terms of the distribution, we've got half a dozen sites if that with margins sub-10%. And that's nothing to do with the market. That's because you'll always have half a dozen sites where it doesn't go as well as you planned. So the overall land bank has got a healthy gross margin.
And the last one is just about -- you mentioned about ramping back up on what into key kind of bench strength across the firm. How quick do you think you could ramp up if the market came back in '24, '25?
We certainly see a bounce back in '25. I guess it's difficult to see you can match '22 volumes or '23 volumes because they're pretty similar in '25. But you'd certainly be walking towards that space. It's how brave you are, Chris, in terms of investing in WIP. And don't discount. And I'd say this to lots of non-operational people. I don't say it as an insult, but there is a step change in specification. This is a generational thing what we're doing.
We're designing out fossil fuels out of homes, and that could cause a hiccup in the supply chain and the delivery of new homes. So I guess those two things: confidence investing in WIP; and your changes specification might not get back to you to where you was, but you'll be heading that way.
Glynis Johnson, Jefferies. A few, if I may. The acquisition in strat land is intrigued. So I'd just love to understand a bit more about why you did that M&A in strat land, and also just the capital allocation between strat land and maybe off-site manufacturing given the standardization that you are bringing in through Artisan? Then secondly, part exchange. What's the scale that you will go to on-part exchange?
And then just lastly, the practical interpretation of the standards of remediation, what does that actually mean? Does that mean that you think there are ways of being more efficient in terms of remediating? Or does that mean that actually there's going to be a huge cost creep because actually the practicalities are nowhere near what's on paper?
I'll do the first two. You'll do the last.
Yes.
The idea on strat land and there was a period when we were talking about delivering 12,000 homes, not too long ago, Glynis, and buying that volume of land in the open market. Without having the benefit of a decent strat land bank is high risk, and it's pretty brutal. And we felt that investment in strategic land coupled with our longer-term growth ambitions is the right thing to do. And I would hope despite the dysfunctional planning system that by '25 our strat land bank allows us to pull 20% plus through the strat land bank, that's the ambition.
And it certainly gives me a little bit of flexibility. So whilst I'm not buying much land at the moment, Glynis, we are working bloody hard on planning to bring that strat land through in future years. And the strat land company that we bought was a second smallish acquisition. And it's a combination of options, promotional agreements and freehold strats. So it's a good three- to five-year investment for us, whilst we're building up our states in-house.
And on modular, I'm not a big fan of modular housing. I've seen it being manufactured. I've seen it on site. But we do now -- by this summer, we will have an entire region in the Northern Scotland that's -- all new developments will be in timber frame, Glynis. So that will be five divisions across the group. And once we've bedded that in and the house types are updated to reflect the new building regs. That gives us opportunities going forward, whether you've got a timber production so doing something in the future. Keith, can you do PX and SRT?
Yes. So on part exchange, it's 1%, 2% of reservations at the moment, and it's not unusual for it to be 5% to 10%. And we've had a balance sheet investment of £50 million, £60 million in the past. So I suppose their -- frames a historical position in terms of what it might reasonably get to. It is a useful incentive. And if our divisions had there where we use it all the time, but it's all you're doing is swapping a nice, shiny new little property, which looks good and is energy efficient and with the secondhand-type thing which needs to be refurbished.
So I'm a little bit more cynical on it as you might be able to tell. But it is a useful tool, but it's important that it's very, very well controlled because you just almost shifting profit a little bit about. So it will increase, but we have to use it in the right places and make sure we put the right levers on it. On PAS, I mean you saw from -- sorry, on the remediation standard on the SRT, usually asked that because the point I was almost trying to make was, we've cautiously assessed our buildings in line with current building regulations and the requirements as to what they might say.
You've got this thing called PAS, which is the required standard of remediation on external walls, which is intended to be more proportionate. So that, in theory, should mean that there is a possibility for savings in due course. Now I wouldn't go in and predict those because the reality is assess is a very cautious and for you to put your name to a piece of paper which says, well, I know building regs say this. I've now got a new standard, which allows me to be more proportionate, but you've got all this litigious background. I'm going to be a bit more pragmatic.
It's a little bit unlikely at the moment. But I'm saying over a period of time, PAS might become a little bit more pragmatic and pass might be a bit more useful and you might get to a more efficient way of remediating things and take all of the boxes. So it's hopefully a long-term upside.
Can I be cheeky and ask one more? Just incentives. Can you just -- I'm just wondering how much of incentives right now just as color are coming through in kind? So carpets, tariff, curtains? And how do you think that might change with your Easter rollout? Is it going to become more financial contribution towards a deposit -- contribution towards cost of living more impactful in terms of your actual profits?
Yes. I think at the moment, our -- for the first three months of the year, it's driven by mortgage subsidy because that was the big headline. So that's what we led with. And then sometimes you can have the softer bits, the carpets, the cartons and some specification items. What we'll probably do, Glynis, through Easter is change our message just to keep it fresh from mortgage subsidy to deposit contribution going forward. But that's, as I say, it's the same amount of money. Same meat, different gravy sort of thing. It does the same thing.
John Fraser-Andrews, HSBC. Three for me, please. First one on the increase in affordable housing, social customers, is this a temporary measure to keep the operations busy during this downturn? Or is this permanent shift? That's the first one. The second is on outlets. Could we have some color on how you see this growing into the next financial year from where they are currently?
And thirdly, on work in progress going into the New Year and into a downturn actually over the course of FY '24 moving parts, I imagine are that there'll be less of it with lower completions, but balanced against that will be your ambitions for growth and any inflation in the value of the WIP. So just some help on that, how that would help the balance sheet and cash flow.
On affordable housing, it's -- we're not changing the planning consents that we're trying to get and offering more affordable housing. We're simply accelerating the social housing, which is already consented. We're not looking to change how we buy land. So not sense it's a temporary measure to collect cash and to help absorb overheads and to keep your build teams busy. That said, the 25% plus this year, I think, will probably increase again in FY '24 because private will likely come down because of where the order book is.
And then you'll start to see that trend reverse in FY '25, would be my guess on this as we answer it now. On outlet numbers, we started the year with 235. We hope to end this financial year with around 245. And we've hoped to add on another 4%, 5% as you go towards the end of FY '24. And then on WIP, you're right, we commented the year with a slightly elevated preposition partly because we've had a strong order book partly because build stages are a little bit more progressed.
And partly because you've got a change in building regulations from June of this year, and for us, to have sites with two sets of building regulations is complicated. It's costly. It's difficult to manage. It requires two sets of design drones and such like. So we have invested a little bit to get ahead of that. And that some of the plots will -- some of the sites will have one standard across the whole site where proper to do so.
That means as we go into FY '24, WIP is likely to unwind a little bit. Rather than trying to predict the figure because I can't even predict the volume for next year because it's so uncertain. Maybe I would say capital WIP turn is likely to reduce in a slower market. You need more investment in the ground. People like to come and see your product. So WIP turn of, I don't know, 2.3 in H1 this year. I would expect probably that we just under two in the next financial year. That's probably the best sort of guidance I could give you to work with.
Rajesh Patki from JPMorgan. Just two questions for me, please. I know you talked about the WIP, but any incrementally key moving parts in the cash flow statement for this year that we need to keep in mind? And secondly, in terms of wage inflation levels within the bill cost as well as on the admin side, are you looking at for this year and early into next year?
There's nothing really to pick up on the cash flow for this year other than obviously, we're commencing the share buyback today. So you make your assumptions in terms of how quickly. I think we said by July, for the first £50 million, but hopefully it might be a little bit earlier. I'm not giving you a forecast on what wage inflation will be going ahead. We need to have those decisions to make those conversations internally.
Last year, our wage bill went up by around 7%. So that gives you sort of a feel in terms of the level it was. I'm not convincingly as high going into next year. But there are still pressures there despite reduced volumes. There are still demand for highly skilled people within the sector. So we really still feel the pressure there.
Samuel Cullen from Peel Hunt. I've got two, if possible. Jason, you mentioned a couple of the kind of weaker sales areas Southeast, Southwest. Are there any sort of commonalities around across those sites that are weaker? Or is it just regional slower in the Southwest and you said sort of affordability challenges in the wider Southeast? And then the second one around kind of related to the air source heat pumps you made. And you also made a comment around kind of changing the restructure to take more PV. Should we read that whereas air source heat pumps might not be sort of a standard product going forward, PV will be a standard product going forward?
Just on the market, I would suggest that the parts of the Southwest are a little bit weaker, possibly on the South coast, places like Somerset, we'll share when you get out to that space. Whereas the Southeast of England, I wouldn't describe as weaker. I'd just say it's more price sensitive because of your entry point. So if you're going to get someone who can afford a 4% mortgage and pay $500,000 for a three-bed, they're more likely to need the full incentive in that space.
So -- but certainly, Southeast I wouldn't suggest is weak, just a little bit more price sensitive. And in terms of PV panels, well, certainly, they're part of the changes on the interim regs are -- two key points. One is the fabric and secondly is introducing PV onto the roof. In terms of future home standard, there's an enormous amount of work going on, not only just to work out what type of vessel heat pump you have, but where you locate it, how much noise it makes, do you need PV instead, can you supplement it? It will be too early for me to say I've got the solutions.
I think that's a little bit of work in progress. And I'd love you to come up to Manchester and have a look at what Barrett and ourselves have built up there because it's quite interesting, and you can see what's changing in the industry because it's quite significant. And there's a whole like multitude of different specification items. Not all of them we're going to do, but they're all being tested and trialed and it's quite interesting.
Marcus Cole, UBS. Two questions as well. I was just wondering about the sales rate. You mentioned it was 0.75 pre-COVID. I was just wondering what you think that is underlying stripping out Help to Buy? And then just the second one is what do you think the fixed cost is in the business?
I'll do the first and maybe Keith, do the second. I did mention to Chris, when I mentioned 0.75 that we hadn't always done a rate per outlet. So I don't want to give you figures that are misleading. I can't -- we just looked at sales rates and come up with a blended figure to make a comparison to where the market is today. I couldn't tell you what it is when you strip out Help to Buy.
Sorry, the bit on Help to Buy, and Keith may embellish this. But the people you've lost in the market is the first-time buyers that were dependent upon Help to Buy. First-time buyers are still buying if they've got a deposit. So we've still got plenty of first-time buyers, but there was people that were reliant upon Help to Buy to get a good mortgage rate and a gift to deposit and they're out of the market. So you haven't lost 30%, you've lost a small amount of first-time buyers that we're not seeing at the moment. Keith?
Yes. That's what I was going to say. Help to Buy was about 1/3 of sales back then of total sales. So it helps you frame the math a little bit in terms of sales rates. Fixed overheads, I mean, it's never a precise what's fixed, what's not. Roughly £20 million per month would be our run rate of fixed overheads. And that's across three captions that's across, what I would call, site-based overheads, sales-based overheads and administrative overheads. All add up to around £20 million per month.
But don't forget, site-based overheads get charged to a job and ultimately comes through the P&L as you take completions, it doesn't directly go to the P&L. We all have studied nuanced approaches in terms of how we recover costs.
Jason, on strat -- sorry, on land, I think you said there have been 50% of your contracted land deals were -- that had walkaway clauses, is that -- was that lower in the past?
Yes. Alastair, it's a good question. It's not typical, Alastair, to have walk away clauses because land owners want certainty. But there was a period where market everyone had stopped buying land. And there was a few landowners that still wanted to pursue deals. And the risk was too great for us to be unconditional.
So the compromise was, in some instances, if we thought it was a good location in an area that we wanted to be, that we would contract -- pursue the planning application on the proviso that if we didn't like the look of the market when we get consent in the summer of '23 or beyond, we could say no thanks.
I'm not sure we'd still get away with that today as the sales market is improving. I think that was just an opportunity that we had last autumn, and that will probably disappear.
And the second question is based on Glynis' question on the acquisition of the strat land company. There is two or three subtle changes in the announcement today. It seems to be more strat land in your outlook. There's the share buyback and also you're actually doing sales rates per site hinting at it, at least acquisitions, would you -- another really associated to Bellway with acquisitions -- with M&A. Would you consider that more now than in the past?
Well, my appetite for the business was always to increase the depth of the land bank because that was certainly sort of a structural weakness, Alastair, going forward, if you had long-term growth ambitions. And I would suggest, we've had a good spell on land, particularly in that early pandemic phase, where we bought a lot of land at decent prices. We're now sitting on a land bank, 5, 5.5 years of supply.
I don't need to go into the market and buy too much land. But a way to strengthen the business going forward is to have the opportunity to keep working on land and pulling it through that strat here. I'm sure as we get to the end of this calendar year, and we start to burn through some of that land that we're going to need to start thinking of looking back into the market. But in that period, we'll be working hard on land. So I hope that avoids the question sufficiently.
Specifically on the acquisitions of house builders, would you consider it?
I'd probably say less so because of the benefit of the land bank. And one of our strengths has always been our operational side. We're good at bloody delivering. You haven't seen me in front of you saying I've missed all my numbers. I've now got the benefit of a decent land bank at good margins. So I'd say that's less likely, but never say never, never seen it.
And just to follow up on the strat land, I mean maybe it hasn't come cross clearly enough. But if you look over the past few years or so, we have embedded our disclosure around strat land. We've been saying for some time.
We've been trying to build up that strat land investment. I think we mentioned in October, we had a mini land company, which we bought the back end of last year and this one that we bought again this time.
And these aren't big trading entities. They're asset deals in a corporate rate. So there's nothing in, I don't want to belittle it, but it's an asset deal really as opposed to buying a big trading operation.
Are we all done? Thank you very much for your time. We're here all morning, if anyone needs a chat afterwards. Thank you.
Thanks everyone.