Annual Report and Accounts 2010

UK housing market

We entered 2010 with concerns regarding ongoing political and economic uncertainty. The relatively robust market conditions that we have experienced over the year proved to be slightly better than our initial assumptions.

We saw solid demand in the first quarter of the year, with some underlying price increases before a slight softening around the general election in May. Once the outcome of the election was known, we saw an improvement and the summer trading period was slightly ahead of our expectations. As we moved into autumn, we saw another softening of demand as customers awaited the outcome of the Comprehensive Spending Review in October. As with the general election, once the uncertainty had been resolved we saw an incremental pick-up in sales.

Following a gradual improvement over the course of 2009, mortgage availability has remained restricted through 2010. According to the Bank of England, the total value of loans approved for house purchases during 2010 was £80,106 million, a slight increase on the £77,780 million in 2009.

Interest rates remained at an historic low of 0.5% throughout 2010 and there has been a gradual increase in the availability of higher loan-to-value mortgages, albeit at a significant premium to those mortgages available to customers with a bigger deposit.

National house price indices do not show a clear trend for 2010 following the annual increases reported for 2009. The Nationwide House Price Index shows a rise of 0.4% over 2010 to an average house price of £162,763. By contrast, the Halifax House Price Index reports a fall of 1.6% during 2010 to an average house price of £162,435. Our own sales data shows a small increase in selling prices over the course of the first half of 2010, followed by a marginal reduction in the second half.

Compared to our own experiences of mix-adjusted house prices, the national indices tend to exaggerate the movements and we would expect this to continue into 2011.

Industry volumes improved during 2010, with the housebuilding industry, including housing associations, starting just over 115,000 homes compared to less than 90,000 in 2009, according to the National House-Building Council. However, the quarterly trend has been downwards since the end of the second quarter of 2010. Industry volumes remain significantly below the level of household formations, with the most recent forecasts of an average of 232,000 per annum from 2008 to 2033 for England alone.

The level of housebuilding in the UK is a key focus for the new government and its Localism Bill was published in December 2010. The bill, which is currently progressing through the parliamentary process, is intended to devolve power for planning decisions to the local communities that such decisions impact upon. The government has also published details of a New Home Bonus scheme, which is intended to link financial benefits for local authorities, and by extension their electorates, to decisions to allow development of new homes. We support the government's intention to reform the planning system and comment on the potential impact of the bill in more detail in UK Housing landbank.

There has been a variety of reactions from local authorities to the proposed changes and we continue to work with the government to deliver an implementable system that is capable of supporting an increase in the supply of new homes.

Financial review

Revenue from UK Housing was £1,736.6 million (2009: £1,700.4 million), with a higher average selling price outweighing the impact of a slight reduction in the number of home completions. Operating profit* was £123.0 million, a significant increase on the £14.3 million achieved in 2009 and the operating margin has risen sharply, from 0.8% in 2009 to 7.1% in 2010.

There are no exceptional items relating to the UK Housing business during the year (2009: £452.8 million).

Net operating assets in the UK were £1,628.6 million (2009: £1,693.1 million).

Sales, completions and pricing

Market conditions in the UK were broadly flat in comparison to those experienced in 2009, albeit we saw some softness in the market around the time of the general election in May and again at the time of the Comprehensive Spending Review in October.

We achieved a net private sales rate per outlet of 0.51 for the year as a whole (2009: 0.55) and cancellations remained in line with the long term average at 18.2% (2009: 18.7%). We increased our number of outlets to 301 at the year end from a low point of 271 in September 2010 and expect to deliver further growth in outlet numbers during 2011.

We completed a total of 9,962 homes in 2010 (2009: 10,186), of which 8,103 were private completions (2009: 8,432), 1,824 were affordable homes (2009: 1,709) and 35 were our share of joint venture completions (2009: 45). The overall average selling price for these completions was £171k, an increase of 7% over the 2009 equivalent of £160k of which around two-thirds was mix-related. The average selling price for private completions increased to £184k (2009: £171k) and the affordable average selling price rose to £116k (2009: £108k).

Our year end order book was 4,684 homes (2009: 5,431), reflecting a slower sales rate in the second half and our ongoing strategy of prioritising margin. The success of this approach is illustrated by the margins in our order book, which are significantly higher than the 2009 comparative.