LONDON (Alliance News) – Trafalgar New Homes will continue building houses for affluent clients in Kent, Surrey and Sussex as it gears up to start paying its new investors a dividend from next year, with no plans to branch out into other regions, its chief executive says.
That might seem unambitious, but the company is still rebounding from a time in administration in 2010 and 2011, recently attracting new investors by listing on AIM. That’s made new Chief Executive Chris Johnson cautious and means the company will stick to what it knows best: building homes, apartments and town houses in affluent areas around towns like Royal Tunbridge Wells.
“The key to housebuilding is to have enough cash, always have enough cash,” he told Alliance News in an interview.
“I couldn’t tell you what value you could get for land in Newcastle-upon-Tyne, Coventry or Birmingham. Yes, I could go and find out but my motto is stick to what you know. In our case it is Kent and we know Kent values and prices,” Johnson says.
Johnson does want to grow the company and is prepared to make acquisitions to build scale in its geographical area, but no more than that for now.
The new CEO has a history of floating property firms, most recently overseeing the Propan Homes listing on AIM in 2001 – a company he founded in the 1990s. Propan was later sold for GBP9.4 million in 2004.
He then set up another housebuilding company which was sold for GBP3 million in December 2006, and subsequently established Combe Bank Homes. Johnson was approached to takeover the “moribund” Trafalgar in 2011 and Combe became its trading subsidiary in a reverse takeover.
The company has since strengthened considerably, building residential and recreational homes in Kent, Surrey, Sussex, close to the M25 circling London. Last month it said pretax profit more than doubled to GBP617,976 for the full-year to March 2013, from GBP292,960 a year earlier, albeit with a gain on a disposal.
The company now hopes to start paying a dividend in 2014.
In July, the Trafalgar made the “logical step” of moving from ISDX to AIM, which it hopes will attract new investors, improve liquidity in its shares and allow it to raise additional capital when required, making it easier to do acquisitions.
“Why go public when you can stay private? At the end of the day nobody will take your private paper if you wanted to acquire somebody, they will take your public paper,” Johnson told Alliance News.
“It is very nice to see your shares quoted at the price and the value put on your holding which [is] considerably greater than what you would put on yourself if you were to stay in the private sector,” he said.
A housebuilder’s valuation as a private company is based on its trade sales, but listed companies get a higher valuation, he says, and that’s going to be helpful as the company continues to grow.
The UK housing market was hit particularly hard by the financial crisis, but there have been signs of improvement this year with house prices increasing and more properties coming onto the market.
Some observers have suggested that the main driving force is government schemes such as Help-To-Buy, which aims to get first-time buyers back into the market by aiding financing. The programme guarantees part of a borrower’s mortgage advance, allowing them to get a loan with a lower deposit than would be normally required. The scheme will be extended in the next two weeks to second homes up to a value of GBP600,000.
Large housebuilders including Crest Nicholson, Persimmon and Taylor Wimpey have cited the scheme for recent increases in profit, although detractors say the programme is potentially creating a new property price bubble.
That’s not true, says the experienced Johnson. “We had a boom in the 80s and 90s. The last cycle went to 1992, the dark days, all the way through to the late 90s and then we had a run all the way to 2006. The cycle used to be five years, but now it is ten. I don’t think its back to being a five year cycle, it may go back to being a 20 year cycle, but I do believe it will be 10-to-15 year cycle.”
Johnson says Help-To-Buy has its merits but is not likely to help Trafalgar New Homes because it lacks the resources to “wade through the 127 pages of documentation”. Also, Trafalgar’s clients are generally more affluent than those who would be tempted to use the scheme, typically looking to downsize so that they can invest elsewhere.
“These are people who would not even think of Help-To-Buy,” he said.
An advantage for Trafalgar New Homes is that it operates in an area where the big housebuilders are almost absent as they prefer to concentrate on big towns and cities like London. Dog fights for land are few and far between, as major housebuilders dismiss the smaller plots snapped up by Trafalgar, fearing how much it would cost them in administration.
Over the past 12 months Trafalgar has acquired sites in Ticehurst, East Sussex and Tunbridge Wells, Kent for the development of two units and six units, respectively, and development work will be undertaken on these two sites during this year. In addition, it is anticipating that it will develop a site it already owned in Sheerness, Kent. The three sites could contribute around GBP7 million for the year ended 31 March 2015, he said.
Johnson is happy with the size of the company’s land bank, which will last it up to 2015. However, the firm has sought to buy land in Staplehurst, Kent, for a “beneficial purchase price”, he said. The land has been earmarked for a substantial residential development and it is anticipated planning permission will be granted on the five acres once the planning application has been submitted.
“I know we need stuff for 2016, over and above Staplehurst, but bear in mind we are building 13 units etc. I wouldn’t want to be in any other position,” Johnson said.
The big attraction for investors in Trafalgar New Homes is its relative valuation compared with the bigger companies listed on the main market, which have seen share prices rise sharply this year as the housing market picked up.
“Small housebuilders traditionally sell on a rating lower than the medium and big sized boys and understandably. But there is a gap to bridge which could be very profitable for investors,” Johnson said.
By Anthony Tshibangu; anthonytshibangu@alliancenews.com; @AnthonyAllNews
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(Exclusive interviews with UK company CEOs are a feature of Alliance News Professional.)