Lenders hold keys to revival, says Bovis boss

By Hugo Duncan for the Daily Mail
Updated: 04:22 EDT, 12 May 2011

Housebuilders in Britain have become 'forced sellers' because of the mortgage drought plaguing the property market, according to David Ritchie.

Building bridges: The industry has had to step in and help first time buyers, says Ritchie

The Bovis Homes chief executive says an unintended gap has opened up between what buyers can raise as deposits and what banks are willing to lend.

He argues it is now up to housebuilders to bridge the divide - or face the consequences of a more subdued recovery, or even a prolonged slump.

'The most likely players to fill the gap in the short-term are in the housing industry, because we are forced sellers,' says the 42-year- old.

'When I say forced sellers, I don't mean distressed sellers. We, as an industry, have to sell houses. But the reality is that some sites will go for weeks without achieving a sale. We are working hard to try to get lenders to the table to talk about solutions.'

This is not to say that the industry is on its knees - far from it.

It has recovered admirably from the dark days of the financial crisis, when the biggest housing crash on record left many builders on the verge of collapse, and updates from both Bovis and rival Barratt Developments yesterday showed further progress.

'We are still seeing a lot of demand,' says Ritchie, one of the youngest chief executives in the FTSE 350.

'But what is clearly frustrating a lot of people is that they come to us not really sure that they can access the mortgage market, and then as soon as they venture into the market their fears are crystallised.'

As such, Ritchie sees house prices 'bumbling along' this year. 'But flat prices for us will be absolutely fine,' he says.

Bovis has been the most aggressive buyer of land in the sector over the last 18 months and plans to increase its number of sales outlets by 15% this year to 76.

'More sites mean more sales,' Ritchie says. 'In a flat, stable market - which is where I believe we are - this increase in capacity gives us the ability to grow the business without a market recovery.

'We can absorb some price pressure and take advantage of some price accretion. But we are not relying on house prices increasing to improve revenues and profits.'

Having been over-exposed to the north of England in the downturn, Bovis's focus is now on traditional family homes on green-field land in the south and it has been snapping up sites with gusto.

'It is simply about managing a cycle and being a little bit lucky and a little bit skilful,' says Ritchie. 'But that is why we are talking about growth today without a market recovery.'

The City is taking note and investors are once again looking at the shares. While other sectors have recovered strongly since their 2009 lows, the housebuilders are still 50% to 70% off their peak.

The main threat to recovery is, according to Ritchie, the mortgage drought starving the market of buyers.

'It's the biggest constraint on the market,' he says. 'But you can't sit there and say "never mind". You have got to do things.'

In previous downturns, such as that of the 1990s, the obvious solution was cutting prices. But, says Ritchie, this would have little effect this time around.

It is easy to see his point. Industry figures show that the average age of first-time buyers has reached 37, and four in five need help from their parents to get on the property ladder. They now require deposits of at least 20%, up from 5% to 10% over much of the previous 30 years, and the average deposit has jumped from £12,000 in 2007 to £30,000 in 2010.

That means a first-time buyer would need £30,000 to purchase a £150,000 house. If the price is reduced by 10% to £135,000, the buyer still needs £27,000.

'Reducing my prices by 10% doesn't make life any easier for a first-time buyer,' says Ritchie. 'It doesn't work.'

The key, he explains, is helping to improve lending, particularly to first-and second-time buyers. Many of the latter bought at the top of the market and have no equity following the drop in prices. Bovis recently launched its 'Perfect 10' scheme with Barclays, through which the buyer pays 10% of the value of the property and the bank lends 90%.

Crucially, Bovis provides insurance to Barclays worth 11% of the value of the house to cushion the lender from potential losses.

'This is a balance of risk and reward for us,' says Ritchie. 'We get more transactions, but there is a cost to us which is the risk that some of these will go into default and some will be repossessed.'

Other housebuilders have launched schemes of their own, and Ritchie is convinced some sort of industry-wide protection for lenders through insurance is the way forward.

But to really make a difference, he believes, banks must be prepared to lend 95% of the value of the property - something which could set alarm bells ringing after the reckless lending seen in the years before the debt-fuelled boom turned to bust. 'I'm not in any way advocating irresponsible lending, but lending at 95% has worked for decades and there is no reason why we shouldn't get back there,' he says.

The Government has also played its part - first with HomeBuy Direct under Labour and then First Buy, which George Osborne launched in his March Budget to provide £250m to 10,000 first-time buyers.

'We are very grateful for that,' says Ritchie. 'But we have to recognise that 10,000 is not going to be a sustainable solution to the housing market.

'It will help fill the gap a little bit for the next 12 to 18 months. We need to find a solution where we can bring 100,000 or 200,000 firsttime buyers back into the market.'

Ritchie says the cash would be better used to guarantee loans - much in the same way as Bovis insures them - to encourage banks to lend. The father of two, who joined Bovis in 1998 after qualifying as an accountant at KPMG, also welcomes ministers' plans to reform planning laws and ease regulations. But, he says, the top priority has to be mortgage lending.

'Planning will be an on-going issue but it is not the short-term mega-issue that finance is,' explains Ritchie. Nothing will encourage a housebuilder to build more houses or buy more land if they cannot find customers. We had an interesting few meetings with government in the early days of the Coalition where they wanted to talk about planning, and we said "we need to talk about mortgages first".

'Then they wanted to talk about regulation, but again we said "let's talk about mortgages". We are fortunately now in a situation where, when we have meetings, mortgages are at the top of the agenda. If you want to spend half an hour talking about the housing market - because you only get half an hour with the minister - you don't talk about regulation, you don't talk about planning, you talk about mortgages.'

Ritchie argues that an increase in mortgage lending can lead to a boom in housebuilding and drive the economic recovery.

'We could build more houses on every single site,' he says. 'We have plenty of land we could build on today and housing is required. The housebuilding industry can assist in driving the economy back into growth. The labour that is involved in putting together a house is significant and the prosperity it can create in a local economy is equally significant.'

FACTBOX

• NAME: David Ritchie

• BORN: April 30, 1969 in Falkirk, Scotland

• LIVES: Near Maidstone in Kent

• JOB: Bovis Homes chief executive

• FAMILY: Married with two sons

• HOBBIES: Gardening, maintaining his 500-year-old home, golf

• CAR: BMW 7 series