Cairn Homes plc (CRN) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to our 2021 interim results call. Shane and I will present on the performance and prospects for Cairn for the next 30 minutes. If I was to summarize the 2 key points, at the outset, I would say that firstly Cairn's first half sales performance has been very strong, especially when you consider that our sites were closed for approximately 13 weeks due to the government's public health restrictions. Secondly, there is now momentum in the business, which leads us today to raise our 2-year operating profit guidance to the year and next year by 14%. You will see from Slide 3 that in addition to performing well financially, the key attributes of our business are also a strong as ever. The health and safety of all our colleagues remains our top priority. We strive day in day out to build quality homes and excel at customer service. Our investment in our people is relentless with over 50 new hires this year. The support of our supply chain partners is steadfast and we're now back with over 2000 full-time positions, working on our sites every day and this will grow to over 3,000 next year. We are achieving new highs for our business in sales and we are playing a material role in delivering new homes, particularly for first-time buyers. And finally, the economic backdrop is also very encouraging. So let's look at some of the key KPIs on Slide 4. We've had a very strong sales performance with 403 closed sales in the first half of the year and 832 new home sales. Our market sales rates per active sales outlet are very strong at 3.7 per week and we sold out completely on our 8 virtual sales launches during H1. Since we last reported in March '21, we have more than doubled our current closed and forward sales to 1,750 units and EUR 655 million in value. We are seeing good margin progression in our business with 19% this year. And next year, we do expect to bridge 20% margin -- bridge 20% gross margin. This is largely being delivered through operational efficiencies in our business, which I will cover in more detail later. And as I already mentioned, we're upgrading our profit guidance by 14% to a 2-year operating profit to the end of 2022 of EUR 137 million, that's an increase from the last time we spoke to you at EUR 120 million in March 2021. And our Board are re-implementing dividends of EUR 0.0266 per ordinary share as an interim dividend. And Shane, later on, will cover the operating cash flow. The business will still generate between EUR 350 million and EUR 400 million despite our ambitious growth plans and future investments in our work in progress. Moving on to Slide 5. And I suppose, timely that the government initiatives and strategy, Housing for All, was revealed last week. There is a strong bias in this plan towards social housing solutions which I welcome and are badly needed. People in Ireland earning between -- earning less than EUR 47,000 can qualify for social home. Our core market is the large and growing stock middle of the market, which is single people and families earning between EUR 60,000 and EUR 90,000, many of them living in expense of rental accommodation and many who can't qualify for a mortgage under current CBI macro-prudential rules, particularly our 3.5 times loan-to-income ratio. We estimate that there are 500,000 people in this bracket and very few of them own their own home today. So look at -- let's look at the measures, which have been a focus in this sector. The government has announced enhanced shared equity loan scheme, which we expect to commence next January with an annual target now of 2,000 new homes and funding to deliver 10,000 by 2025. We will look a little bit more closely at the impact of that for our customers later in the presentation. The government has also charged the Land Development Agency and increased their funding to tackle affordable housing mainly for this cohort also, including a target to deliver 5,000 affordable homes on non-state land. Large-scale housebuilders can deliver affordable homes faster and at better value for the state than traditional procurement routes using main contractors and I welcome this move. Moving to slide 6, the low-cost landbank and the planning gains and operational efficiencies that are driving our margin improvement. The timing of our landbank acquisition and the planning gains that we've achieved are now being monetized on active sites. We have 16,500 units in our landbank with an average plot cost of just EUR 38,000 and we've delivered 4,200 incremental planning unit gains through planning. The planning system in Ireland is, unfortunately, at the moment, not in good shape, with larger well designed and much needed new development stuck in our courts. The SHD system is wrongly blamed for this problem, in my view, and an irrational fear of apartment buildings amongst existing residents is often a bigger issue. Cairn is very fortunate to have a large landbank, much of it that we've brought through the planning system over the last number of years. And importantly, over 90% of next year's sales already are on sites and developments that we are either active on or where we have already achieved full planning permission. Moving to Slide 7, managing our supply chain. Cairn has built a deep pool of sub-contractors over the last 6 years. During this challenging period and coming out of the lockdown, these relationships have held firm. We did introduce some additional supports for our sub-contractors during this period, including financial support and regular financial health check carried out by Shane's finance team. Our dedicated supplier relationship managers have played a key role for us during this period also. Our top-20 sub-contractors work on average concurrently across 12 of our developments, as you can see from the slide, and we have averaged a total contract spend of over EUR 30 million to date with these top-20 sub-contractors. Our central procurement function is leveraging EUR 650 million approximately of procurement across this year and next, and we are fully committed to delivering further resilience, improved collaboration with our sub-contractors and supply chain and continued innovation. Moving to Slide 8 and talking a little bit more about materials. There has been an unprecedented global demand for materials, increased shipping costs and many commodities remain at abnormal pricing levels. However, we are seeing some commodities, including and probably more importantly, timber prices starting to correct more recently. We have seen build cost inflation of circa 3% to 4% in the last 12 months. A similar level might be expected in 2022 across the sector. However, we don't believe that this will impact on our forecasted gross margin progression to just over 20% through this period. From what I've observed from our U.K. peers and their results presentations, we are not experiencing the added Brexit-related challenges on materials and labor evident in the U.K. Many of our materials are produced in Ireland and as mentioned earlier, the way we approach our business gives us confidence that our labor resources through our sub-contractor relationships are fully secured. Moving to Slide 9 and our work in progress investment. Growth over the last 4 periods is shown on the slide. We've invested EUR 81 million since the start of the pandemic, and we are 1.7x covered by our very strong forward order book, which I referenced earlier. As we continue to grow and invest in our business, we will open up 10 new sites in the next 9 months. Slide 10 and our current sales rates. Our sales performance has been remarkable and on Slide 10, we outlined some of our sales KPIs. Our closed and forward order book has grown by EUR 441 million this year, following the very successful virtual sales launches during the lockdown and an impressive sales rate that I mentioned earlier of 3.7 sales per week per active sales outlet. For me, the most important number on this slide is the 3,100 first-time buyer homes that we have now sold as a business. And the average sales price on those homes is just under EUR 350,000. Momentum into the autumn season has been strong. We have an average of about 2,000 registered inquiries for our 3 sales launches this week, for example, in Naas, Maynooth and Delgany. So the market is certainly very strong as we move into the autumn. Slide 11 and the multifamily market. More appropriate land use and more sustainable development, including higher densities and urban and suburban areas, is an irreversible trend in Ireland and globally. That's why Cairn has developed expertise across the full range of products that we build in support of our ambitious growth plans. Apartments have been a steeper learning curve due to our higher building standards in Ireland, regulations and the fact that no apartments were built in our country for over 10 years. There is a very small pool of housebuilders and main contractors who have the expertise and track record in building apartments in Ireland. We have completed 8 transactions to date and pension funds and investment funds, unsurprisingly, remain attractive to the Irish market due to the extreme undersupply of new quality rental accommodation. We believe that Cairn will remain a counterparty of choice for these investors, and we have just under 5,000 apartment units in our upcoming pipeline in areas of high demand. I'm now going to pass you over to Shane, who will bring you through our H1 financial results and guidance, talk to you about our important sustainability agenda and discuss our capital returns. Thanks, Shane.

Thank you, Michael, and good morning to everybody. I'd like to turn to Slide 13 initially. We thought it would be useful to give you an update around the very favorable macro environment and indeed, the trend lines that are seen in the Irish economy and the broader market. The title of the slide provides us the same summary in that regard with really strong GDP growth. As an English-speaking open economy and a committed member of the EU, Ireland remains a very attractive location for FDI investment and has always punched well above its weight in that regard. The fundamentals of the Irish economy are also underpinned by strong growth in some of the more domestic indicators as we've seen in the latest returns. Income tax continues to outperform and is 6% ahead of the original profile and over 18% in the same period in 2020 as many companies emerge from a very difficult COVID period. I think significantly, for the month of August alone, income tax levels were close to 20% ahead of August 2019 levels pre-pandemic. Purchasing power indicators are also very positive, as can be seen by the record growth in savings. Ireland has some of the lowest levels of personal indebtedness in Europe as can be seen by the ratios of deposits to loan. Most significantly, the levels of mortgage approvals is tracking ahead of drawdowns and average loan value withdrawn are also up 6% year-on-year. All of those macro purchasing power factors play strongly into current strategy of continuing to invest in WIP and product for sale during the COVID period, which Michael has already spoken about. Turning to Slide 14 and our forecast performance for this financial year and 2022. We are staying very consistent with our March and July update in terms of methodology, given 2-year guidance following our business exiting the second construction lockdown in April 2021. We are in a position to do this due to the strong visibility around our pipeline in '21 and '22. Over 90% of our forecast completions in that 2-year period already have planning permission, coupled with strong market conditions that we currently see for our product, both across private house sales and multifamily, as evidenced by the strength of the forward order book. I'm delighted to say that we are seeing very positive trends across all of our critical financial KPIs that underpin strong shareholder value creation. That allows us to increase our operating profit guidance to EUR 137 million over '21 and '22 from the EUR 120 million that we guided in March and the EUR 125 million that we guided in July. If I start with unit guidance, we now expect the 2-year number to increase by 50 units to 2,550 and that we have closed this year at 1,100 units, well in excess of the previous guidance range of 950 to 1,050 for this year. We are also guiding our gross margin percentage of each year by 1%, which will see us return to becoming a 20% gross margin business next year. This is through a combination of the efficiencies and USPs that Michael has already spoken about across our landbank, across our building capability, pricing and strategic supply chain management. We expect to generate an EBITDA margin percentage in excess of 15% next year, with operations continuing to scale as revenue grows. Continued momentum should see us exiting 2022 on a trajectory of being a 16% operating margin business. All of these sees our cumulative operating profit guidance increase by a very meaningful 14% since we spoke to these numbers back in March. As these revenues and operating profits will flow from the core business activity of developing and selling completed new homes. The uplift in operating profit will also see our operating cash flow increase by 10% to over EUR 165 million between '21 and 22. This gives us a lot of options to continue to drive value for shareholders. Turning then to Slide 15, which provides an overview of our financial performance for the first half of 2021. Our operating profit grew to EUR 11.7 million, which was a key focus for us in a situation where core construction and traditional sales and marketing activities were curtailed for half that financial period. Bearing this in mind, closing 403 sales and more importantly, having a forward order book of another 1,347 committed sales shows the resilience and strength of the current operating model. The EUR 130.6 million in revenue was underpinned by a strong focus on efficiency and cost discipline. Gross margin grew to 18.5% despite some COVID-related costs as we reopened our construction site. This is 50 basis points higher than the full year guidance that we gave for the full 2021 year. This is resulting from a number of factors, not just relating to pricing, but including efficiency gains on the current sites as we leverage learnings from both housing and apartment building. This gives us increased confidence on our gross margin trajectory as we look ahead. We also continue to invest in operating expenditure and innovating our platforms across a number of key disciplines, including construction, IT and health and safety. We'll provide more detail on this in our sustainability section of the presentation. The run rate on operating expenditure for the first half of the year is more representative of the true trajectory of the business expenditure as we continue to scale compared to the number of COVID-related one-off releases in our 2020 numbers. Our operating cost as a percentage of revenue will continue to reduce as a percentage of revenue over the next 18 months; more than 80% of our 2,550 sales units closed over that timeframe, and that will, of course, increase the operating leverage in that timeframe also. The resilient profit performance continues to be underpinned by a very strong balance sheet position. As of June, we had a net asset value of EUR 1.01 per share with a strong landbank underpin of nearly EUR 700 million; the vast bulk of which was acquired very competitively in 2015 and '16. With the gross margin percentage back above 20% next year, our strong visibility on future pipeline, coupled with our full suite of apartment of housebuilding development capability and build, it makes the overall valuation thesis very compelling from our own current perspective. With our strong operating scale platform, we are well positioned to grow that NAV KPI through unit delivery and monetization of our landbank, as outlined on the previous slide, around hitting our revised target of 2,550 units over the next 18 months. Turning to Slide 16. You will note, whilst our blended ASP was down year-on-year to EUR 324,000 from EUR 337,000 in 2020, the reasons for this were purely mix-driven. The average sales price across our starter home increased by 1% to EUR 327,000, excluding VAT. We continue to provide high-quality, A-rated starter homes to a large pool of buyers in excellent locations of proven demand. The ASP increase in the trade-up/trade-down segment is largely a result of a larger number of 4-beds sold in 2021 versus 2020; so purely mix-driven factor. On an underlying basis, we are seeing HPI of between 3% and 4% across our housing stock and starter and trade-up/trade-down. The ASP decline in apartments was purely down to the impact of Citywest numbers for 2021, where the ASP was slightly below EUR 300,000, excluding that. This was a contracted multifamily sale from 2020. Our balance sheet position, as outlined on Slide 17, is underpinned by land at historic low cost and with investment in the forward order book. Our net asset position of EUR 759 million is after shareholder returns of more than EUR 65 million up to March 2020. Our balance sheet is also underpinned by extremely strong liquidity of EUR 194 million, having built up a significant WIP profile of EUR 285 million and our landbank [indiscernible]. There are no debt maturities for us until December '22. Our debt-to-GAV ratio of 18% shows how strongly capitalized our balance sheet is to take advantage of the continued strong demand for our products. We continued to invest in WIP over the last 12 months when the broader industry reduced its level of ongoing and commencement activity. That, coupled with our track record and planning, gives us strong visibility out to 2022. Turning to Slide 18, which shows the key components of our cash flow and debt movements. Our net debt decreased by EUR 18.9 million in that period. Further investments in WIP were more than offset by cash generated from sales and the resultant plan cost release despite a 13-week lockdown in that period. The original strategy of WIP investment is underpinned by the fact that it's covered 1.7x by the value of the forward order book. Cash generation will increase in the second half of the year with units -- with roughly 700 units closing in that period. I'll now turn to our sustainability strategy over the next few slides, ands wish to recap on our purpose and including the highlights showing our progress over the last year. On Slide 20, I wanted to recap on our commitment, which we made for 2021, which was the full implementation and disclosure of our sustainability strategy. We are building on our overall agenda, including aligning to reporting frameworks and for non-financial disclosures, many of which you'll be familiar with, including SASB, GRI and TCFD, amongst others. This will ensure our disclosures are clear and comparable for those used across our industry and beyond, keeping us accountable to our stakeholders. With our KPIs in place and the sustainability matrix is firmly embedded within the business, we are committed to include additional sustainabilities within our remuneration strategy. These will complement the existing customer and health and safety KPIs that we introduced in 2020. To that end, in conjunction with the Remuneration Committee, we are assessing the most appropriate sustainability matrix to include in our short- and longer-term incentive plans, which, of course, allows us to drive the behaviors and culture needed to achieve our sustainability goals. We will continue to drive new initiatives and create a more sustainable business. And as we turn to Slide 21, we present some of the key highlights that reflect some of our year-to-date achievements under the key themes of people, homes and places. These themes are fully aligned to our purpose of building homes and creating places where people look to live. I just want to draw your attention to a few of the key successes worthy of note. We have often stated and Michael indeed outlined at the start of his presentation this morning that health and safety is our top priority. And this year, we achieved a Grade A safety certification, demonstrating that commitment, which is an incredible achievement in what has been a very challenging year across the industry and beyond. Turning then to our aspiration for environmental awareness and stewardship. We have rolled out a biodiversity policy, which commits us to ensuring that from next year, we'll have a biodiversity plan for every single development. Following 2 years of in-depth research, we are pleased to have launched a pilot project, trialing the use of light gauge steel in 2 of our apartment schemes. This product uses significantly less concrete, which should reduce our carbon footprint as well as being a more efficient modern method of communication. I'd now like to just talk about capital returns and how we plan to generate significant value and returns for our shareholders over the next 2 years and into the longer term. If we turn to Slide 23 firstly, we wish to reiterate our commitment that we'll generate up to EUR 400 million of operating cash flow by the end of 2023. EUR 165 million of that will be generated over the next 2 years. The increase in cash generation over the next number of quarters are yielding benefit from our WIP program in '20 and '21. The significant uplift in 2023 follows an extensive period of continued investment in both our apartment and housing portfolio, which we will fund from our own internal cash flows, particularly over the next 3 years, as we grow our business and our annual sales run rate into the medium term. All indicative cash flows over the next 3 years are before capital allocation considerations, including reductions in current debt levels or any strategic land acquisitions. The cash generation, which is roughly half our current market capitalization, provides a uniquely strong platform for significant returns to our shareholders. Slide 24 illustrates how we plan to allocate cash and capital to both the business and most importantly, shareholders. Quite simply, our return strategy is underpinned by the commitment of annual dividend. The floor on these dividends will be EUR 40 million per annum. And as profits grow over time, we expect the payout ratio to move between 40% and 50% of distributable profits. In a normal operating environment, that will provide our shareholders with a minimum of EUR 120 million in dividend payments over the next 3 years. The balance of the EUR 230 million to EUR 280 million will provide returns to shareholders through a combination of special returns to shareholders and also accretive strategic investments. Accretive strategic investments will be subject to a minimum 15% hurdle rate on capital employed using IRR methodologies. I'll now hand the call back over to Michael.

Thank you, Shane. So moving on to Slide 27 and talking a little bit about our landbank. We have nearly 15,000 private homes in our pipeline with a strong bias towards starter homes. Quality-built, competitively-priced starter homes in well-designed, more sustainable large developments will remain our core business. Apartment building is also important, however, and indeed, our apartment developments are margin-enhancing. This year, we will complete and hand over apartment schemes in Rathgar. We'll complete our first number of blocks in our large circa 400 unit development in Griffith Avenue, and we're building apartment schemes in Lucan and in Greystones. We'll continue to bring our experience and learnings to each new development, and we'll continue to leverage our efficiencies on all future projects. We are proud to have completed almost 5,000 new homes since we started our business in 2015. Moving on to Slide 28. Let's look at the extraordinary difference between the cost of renting today in Ireland versus owning your own home. As I said earlier, over the last number of years, Cairn's circa 3,000 starter homes have had an average ASP of EUR 350,000, including VAT. For those customers fortunate enough to get access to mortgage finance, the average monthly repayment today on a 30-year mortgage for this priced home is just under EUR 1,300. As you can see from the slide, today's monthly rental costs for an identical property averages about EUR 2,300, that's EUR 1,000 per month cheaper to own a typical Cairn starter home rather than rent one today in Dublin. We estimate that only 12% of all homes in Ireland are owned by people between the ages of 25 and 40. And 58% of all houses in Ireland are rented today by people under the age of 39. We have seen household savings in Ireland during the last 18-month surge by over EUR 20 billion, which, along with government support, is making the aspiration of owning a home for many of our customers more likely. However, as I did mention earlier, over the passage of time, our macro-prudential rules, which remain strict by any international comparison, have and will become more binding, but they are currently under review by the Central Bank. We mentioned earlier one of the key initiatives in the government's Housing for All strategy. So let's look in a little bit more detail at the impact of shared equity on our customers and on the homes that we're bringing to the market. So Help-to-Buy provides a 10% deposit up to a maximum of EUR 30,000 for new homes priced up to EUR 500,000 in Ireland. Shared equity will provide a 20% equity stake, subject to regional price caps below EUR 450,000. Shared equity purchase will also, we believe, be able to avail of Help-to-Buy, meaning that they require 70% loan-to-value mortgage. So looking at particularly the red highlighted box on the slide, what that means for a EUR 350,000 home. The average salary required at 3.5x income reduces from EUR 90,000 to EUR 74,000. We referenced a very large value of the market and people earning between EUR 60,000 and EUR 90,000 in Ireland. So that's a very significant help to people within that salary bracket. On the bottom right-hand side, you'll see that Cairn's landbank includes over 11,000 units that we will be pricing at below EUR 450,000. So finally, moving on to the outlook. Shane covered quite a bit about the strong economic recovery in Ireland. We believe that demand is even stronger -- is stronger than ever. We will generate significant cash and deliver shareholder returns this year and next. We expect 2,550 closed sales in '21 and '22 and significant volume growth opportunity beyond 2022. That will deliver improved gross margins 19% this year, as we said, and 20% next year and EUR 137 million of cumulative operating profit in '21 and '22. Our EBIT margin, which Shane brought it to you also, will have an exit run rate of 16% in '22. And we believe this is a very favorable comp with our U.K. and Irish peer group. I'd like to thank you for joining us on the call this morning, and we will open to any questions that you might have. Thank you again.

[Operator Instructions] Our first question comes from Shane Carberry of Goodbody.

Congratulations on a great set of results.

Thank you, Shane.

Three from me, if I may. Firstly, just starting on the demand side of things. So look, clearly, I suppose the demand backdrop is quite strong, and you flagged the kind of 3.7x in terms of the sales rate and the order book evolution as well. But are you seeing any kind of deviation, I suppose, in terms of geographically or by pricing point? Or is that pretty broad-based? And two, I suppose, just on the gross margin side of things. Can you talk to us a little bit more about, I suppose, the evolution in the guidance here? I mean, clearly, you're kind of managing the HPI kind of BCI jaws quite well, but you also discussed delight with the planning gains helping out here as well. So if you could kind of give us a little bit more detail there, that would be useful. And then thirdly and lastly, I suppose, just digging a little bit deeper in terms of build cost inflation and specifically on labor side of things, because I think it's something that we've seen in the media quite a lot recently. Are you seeing the benefit of having paid your kind of sub-contractor base rate through COVID? Or are you getting the benefit from that? Or is things still a little bit more difficult on the labor side of the fence now?

I'll hand over to Shane on the guidance point. The -- on labor, look, we're still producing, as an industry, a pretty low level of homes. And I think one of the challenges, which I did allude to earlier, I think that supply probably beyond Cairn and some of the other major housebuilders in Ireland or the small pool of larger housebuilders in Ireland will be constrained by the planning system, I think, over the next 6 to 12 months, which is unfortunate. Housebuilders -- smaller housebuilders in Ireland that are just on 1 or 2 schemes get very badly affected by planning challenges and planning ends up in the courts. So bluntly for me, at a 20,000 annual output, I don't see significant labor challenges. We're probably fortunate that we've approached our business in the way we have, as I mentioned, during the previous presentation and the earlier presentation, and we're going to grow our direct and our indirect labor force on our sites from 2,000 to 3,000. So probably a broader challenge if output increases to 25,000, 30,000, 40,000 units, certainly, a challenge that we're taking serious on the -- I suppose, the new entrants into our workforce. We might be talking at our next results about some initiatives that we're working hard on to try and boost apprenticeships and get young people into our sector because I think it will be a longer-term challenge. But at the moment, we're in good shape on labor. On the demand side, I'd love to say we see some clear deviation or changes, maybe post-COVID changes working from home. As you know, we brought in some initiatives and our own schemes very early in the COVID period to try and support homeworking and changed some of our designs and adapted for that requirement. But honestly, at the moment, we're seeing demand across the full pipeline, full spectrum and across all products. So it's hard for me to identify a specific change. We are seeing demand really for all product types. It's strong everywhere. So I can't really call out any specific area or sector or location. Shane, on the guidance point?

Yes. On the gross margin, look, there's a lot going on there. Clearly, the planning gains, Michael has already spoken about of 4,200 since IPO. So there's absolutely a long-term payoff rate you get from that. I think at a more tactical level, as we keep re-baselining our gross margin, there's no doubt, as we -- like Michael referred to the 8 apartment sites that we've worked on, as we come off and we build up our case study experience, we are absolutely driving efficiencies then on to future projects. And that's seen by us, in some cases, contingency gains rather than additional contingencies coming through. So we're getting a just good old-fashioned kind of growth in terms of just managing our business better and how we benchmark new developments versus existing developments. In terms of the BCI, HBI kind of match, everyone probably on this call is aware of the BCI challenges that are out there. We spoke about 3% to 4%. And the broader industry, you'll hear, will talk about how maybe the average cost to build has gone up from EUR 15,000 to EUR 20,000. I think in our case, for all the strategic reasons that Michael has outlined, we are -- we have been able to cushion some of that, but there's no doubt that the BCI challenge is an ongoing one. And there obviously has been some HPI in the market, but certainly, our margin uptick is not as a result of HPI. It's around managing our efficiencies and then the pricing that's out there. We work on that. Well, Shane, as we look forward on the 20% gross margin, we are very comfortable with that because the way we -- the methodology that we apply to that is, we take our current life pricing and our current cost tax that we see in the market, and we basically apply that to all of our developments over the next 18 months. So I think we would be confident, notwithstanding the significant tailwinds that are there at the moment for the industry that we would be well covered in terms of the BCI and HBI challenge and then continue to nudge away on the day-to-day, just driving greater efficiencies as we learn more in each of the developments that we come over.

Yes. I'd agree with that. The only thing I would add to what Shane said is we have focused, as you can see today, on really scaling our business and increasing our sales rates. And while we have been able to recover our build cost with some price increases, and probably a very marginal improvement on pricing versus build cost, what we're focused on now, I think, is a market opportunity to -- that allows us to be even more ambitious about our future plans. And that's what we focused on this year is selling as many homes as we can, being as active as we can, starting as many new developments and growing this business, having had a tough 18 months as everybody has during the health crisis.

Our next question comes from Jonny Coubrough of Numis Securities.

Congratulations on a very strong set of H1 results. Three questions for me, please. The first one would be on materials availability. And you mentioned that you're not seeing the same challenges as the U.K. builders. But clearly, there's been some global supply disruptions. Just wondering if you're seeing any issues that could cause delays even where you are already procured? And then the second one would be on Clonburris, given -- you mentioned there, Michael, that you've been a bit more ambitious in terms of opening up new sites. So just keen to hear if you've got any update on kind of timing of when units there will be delivered. And in relation to that, the third question is about what you've mentioned in the statement about getting to 4 to 5 years of supply in terms of the length of the landbank. What's your current thinking on how long that would take?

Jonny, I suppose, yes, look, the materials availability point is still very much a watch-out for us, Jonny. We've got to monitor that situation. I did mention that timber prices have leveled off, but we haven't seen where the new floor might be if it exists upon on timber prices. And other commodities, aggregates, steel, rebar, which goes into our apartments, they're all above any historical average. So it's still very much a lookout for us, Jonny. I think probably, for me, what happened post the lockdown in a large -- lot of cases are around materials as well as transport challenges. We believe from our own research, the biggest contributing factor was probably just-in-time delivery, which had become the way most people were managing their businesses. And a lot of the larger players were in a position globally to, I suppose, soak up material supply, which was already reduced and constrained by the industry slowing down. So there was always going to be a correction period, Jonny, and I think we have to hope that we're moving through that period now and normality is starting to re-emerge. So it's a watch-out, but we're comfortable. I mean, the thing that probably separates, and it's maybe important to explain, particularly for our U.K. listeners, that the material impact in Ireland is lower than our U.K. peers because taxation is much higher in Ireland on new homes. So in Ireland, we pay circa 20% of the home value between VAT and other direct costs. So the material element of our ASP is much lower than the U.K., if that makes sense, because of those taxation costs. And therefore, material prices are slightly less hurtful for us, but still something that we've got to manage very well, Jonny. Clonburris is obviously a very exciting development. We are hoping to be building homes. The infrastructure element of Clonburris is well advanced. The funding of that infrastructure is also, as you are aware, being supported by the urban regeneration fund. As regards -- and it's substantial infrastructure, which needs to go in upfront. So it probably means that middle to late next year is when we start building our first homes there. With 5,500 homes to be built in Clonburris, which we believe is an exceptional location, exactly what our city needs, a well-planned new town for 30,000 people, we hope Cairn will deliver at least a third, if not more, of the homes for those people. It's a very exciting development, and we're putting a lot of work into it in the background, but probably mid to late next year, with first house sales closings probably in 2023. The last question was, just to remind me?

Landbank.

The landbank. Look, we've talked before about land cover for Cairn as a mature business being more 4 to 5 years annual cover. And many of our U.K. peer group, as you know as well, Jonny, develop strategic landbanks. They enter into joint venture opportunities and other ways to be a sustainable business without necessarily buying land in the spot market. So we have a lot of optionality, and we have a lot of time to consider the best approach to our land acquisition. And it will likely include all of the things that I just mentioned. And of course, it also depends on what our mature run rate is at the business. We've always been pretty slow to call out, Jonny, what we think is that kind of mature run rate because I think that's something that you've got to achieve the target. We certainly said that 2,000 units is a very achievable target. We'll probably get there quicker than we would have envisaged. Obviously, COVID has got in the way of that growth trajectory. But a lot of it will depend, Jonny, on what we see as our mature target. We will achieve 2,000 units without being a national housebuilder of any -- of scale. So we started our first major scheme in Cork, we have sites in Galway, we have sites in Kilkenny. So we're ambitious about our growth plan, certainly, but it's hard to give you a timeframe. But suffice to say, we still remain committed to that kind of 4 to 5-year land cover and monetizing and not replacing a substantial portion of our existing 16,000 units.

[Operator Instructions] Our next question comes from Colin Sheridan of Davy.

Congrats on the results. Just 3 from myself, if I can. First is, just I suppose a little bit more color on the forward sales. You've obviously added a good number of units since your last update. Just wondering to what extent, in terms of tenure, is there any major differences in there. Are they mostly private at this point in time? And then on shared equity, I suppose it's starting up in January. It's going to be a really positive development for demand in the industry. I wonder, is there an opportunity given the length of your order book and how long it could be to hold back any units for when it launches? The feel I get is that, I assume, most of your peers have order books that would be as long as your own in terms of time to delivery, and I wonder if there's a case where people could receive shared equity in January and not be able to buy a house that will complete until July or August. I wonder how you're thinking about that and whether there's anything strategic to be done around it in terms of holding anything back. And then finally, I mean, you alluded to it slightly in the last answer, Michael, but the ultimate volume ambition, I mean, I know you've spoken about 2,000 units previously. And I wonder with all of these new incentives coming in, whether you felt that, that level of growth is now more achievable? Would you be more comfortable with that kind of a target now? Or perversely, with this kind of incentives, they're going to help out your weaker players quite a lot, could it make it more difficult?

Thanks, Colin. Yes. Look, we've always been really comfortable that 2,000 units was an achievable target for us, and that was always called out as, I suppose, our short to medium-term target. But we don't really think it's sensible, particularly in the current environment to be coming out with a number beyond that at this stage. But bar to say that our ambitions are to bridge that number. And I think where Cairn is positioned, and particularly our relative competitiveness, Colin, certainly would suggest that irrespective of government supports, Cairn, with our advantages, can play a larger part. So that's kind of where we stand on targets. And we have marginally upgraded our volume target into next year, supported by that order book, which I don't believe, actually, maybe with the exception of 1 or 2, I don't think any of our peer group have an order book of that size, Colin. I think, unfortunately, the post-COVID environment in Ireland, Ireland has a long tail of small housebuilders and don't have housebuilders of scale that have been able to withstand the pressures of the last 18 months, and they are now re-scaling. We're seeing the number of commencements moving up, but those commencements will take time to feed through to the market. So yes, I think, look, our order book was all private sales increases, Colin, which is positive. And I think the way we approach the early parts of the COVID crisis and continue the investment with, continue to build where we could, get back and scale as quickly as we can, is now bearing fruit. I don't believe it's appropriate for a business of our size and I don't think we will ever do -- we will ever hold back, particularly as we're a growing business and to hold product from the market. It's just not what we do. And I think the forward order book evidence is that, if more of our customers next year benefit from shared equity, that's a good thing. But I think people should keep shared equity in perspective. During the presentation, we clearly outlined, Colin, that our market size, the value of the market is circa 500,000 people. Shared equity has a target of 2,000 buyers per year. So it's very welcome. But the real market is the 500,000 people in Ireland who don't own a home today and that belly of the market, and many of whom won't qualify for shared equity. So what's important for those customers and from a Cairn perspective is, we have to continue to be innovative. We've got to continue to deliver homes that are competitively priced where they can get access to mortgage finance. And our target ASPs are really, what I suppose, separates Cairn from many of our competitors in Ireland. We can use our scale, we can use our capability, our low-cost landbank, the timing of when we borrow land to continue to build homes where people can actually afford to buy them. And that's going to continue to be a challenge for many of our competitors.

Our next question comes from Arnaud Lehmann of Bank of America.

Three from my side as well, please. So firstly, just a follow-up, I guess, on your margin upgrades to make sure I understand where it's coming from because your volume guidance is broadly unchanged. You say HPI is covering BCI more or less. So could you just go back to the detail of what you said about where your efficiency gains are coming from on the sites? Secondly, just briefly on the Housing for All policy. You say it's skewed more towards social housing. Is it an area where you have any opportunities to do joint ventures or partnerships? Could you expand in social housing? Or that's not something at all you're interested in? And lastly, just a follow-up as well on apartment demand. You seem to say that there's still good level of demand for apartments, and you have a competitive advantage there. I mean, I guess the general point on that was that post-COVID demand for individual houses was higher and apartment was probably a bit lower. It's not something you've experienced at all?

No, actually, no. As I said earlier on, Arnaud, I think the massive lack of apartment building in Ireland for over 10 years and probably the fact, Arnaud, that we were allergic to heights for the previous 50 years means that Ireland has a very, very low stock of apartment buildings. For many years, even in the recovery period in Ireland, largely through FDI investments, we built offices in our major cities at a ratio of probably 10:1 over apartments. So absolutely, we're seeing the trends post-COVID of demand for suburban housing. But we're seeing equally strong demand for apartments, Arnaud, and investment funds and pension funds that want to invest in solid and well-built residential developments. On the social housing side, I suppose where we did discuss earlier on, there's a significant problem in Ireland around social housing, and as big a problem in affordable housing. The government in this particular initiative has probably a much higher investment and allocation into social housing, which I think is appropriate and very necessary, but they've also identified that affordable housing in that kind of, I suppose, EUR 60,000 to EUR 90,000 salary bracket is a major challenge, Arnaud. And the Land Development Agency have been charged with trying to address some of that need on state land. We've talked many times about parallel solutions at working in tandem to solve this crisis. So I'd like to think that a housebuilder of our scale and capability and track record would have opportunities to JV with local authorities, with affordable housing associations, potentially with the ODA. Because I think the state understands that it's going to take it -- certainly, it's going to take a couple of years at least to turn a key on any of the new houses they've planned for their own land. They will get there. They're also dependent in the main -- on larger main contractors in Ireland to build for them through traditional procurement routes. And that's a pretty thin pool as well. Today, in Ireland, in the last number of years, over 80% of all homes built in Ireland are built by private housebuilders. And I don't think that's understood more broadly, Arnaud. So yes, is the answer. We hope that a partnership with government and local authority should be absolutely an appropriate part of our business going forward. And Shane will maybe cover the point on margin rate, Shane, and margin progression.

Yes. Look, I mean, it's a solid kind of 1% across both years, Arnaud. And look, it is all of the above. We -- it's -- obviously, there's a bit of HBI there. There has been BCI, and there has been some efficiencies coming through on the projects. So it's all from core gross margin activity. So it's literally all of the developments that we're on. We've just repriced them, both from a cost and from a revenue perspective. So that nudging of margin, it's kind of hard to say what's HBI and what's core BCI and cost. I think the comfort I can give people on the call is that as we model it out, it's based on today's pricing. So we're very comfortable with that level of gross margin guidance in terms of what we've given.

And I think it's worth just touching on our EBIT margins change as well and central overhead because I think that's really where we have to focus as a business.

And it's probably the KPI that we look at, and I think a lot of people on this call knows is how much profit are we converting after we sell a unit. And I think, again, we'd be very comfortable that we'll be on that journey to 16%, probably a lot quicker than we would have thought. And our operating expenditure as a percentage of revenue next year will be probably around 5%, and that will start nudging down as we scale, but we are very lean from that perspective. So that is the ultimate measure probably that we look at overall. So we've got solid kind of 20% gross margin that's there at the moment with no further HBI or BCI assumed in our model and then the fact that we have a scaled OpEx platform. I think exiting next year at a 16% trajectory on EBIT following a good solid 15% next year, gives us a big, very solid platform to build on.

[Operator Instructions] We currently have no further questions. I'll hand back over to Michael Stanley for closing.

Thank you very much. Thank you for joining us this morning. We look forward to catching up with many of you in person over the coming days and weeks. Thank you for your continued support for our business. And we look forward to speaking to you again soon. Have a great day, and thanks very much.

Ladies and gentlemen, this concludes today's call. You may now disconnect.