Vistry Group PLC (VTY) Earnings Call Transcript & Summary

Welcome to the Vistry Group results Q&A. Today, we're joined by Greg Fitzgerald, Graham Prothero and Earl Sibley. As most of you are aware, we will be inviting people to ask questions over video today. [Operator Instructions] Greg, over to you for opening remarks.

Okay. Welcome, everyone. Thanks, [ Scott ]. And let's get straight on with it, so if you could take the first question, [ Scott ], that would be great.

Well, we've got our first question from Glynis Johnson.

I have 3, if I may. The first one, just in terms of the Homes England partnership that you talked about in your recorded presentation, I wonder if you can just give us a bit of color of what that means for Vistry. Does it mean access to land? Does it mean the grant just gives you that better or more [ deferred in price ]? If you can just tell us what that means for you. Second of all, you've [ tempted ] us with this special dividend, excess cash. If you can maybe talk us through how we should think about that. Is there a certain level of net cash, average net cash, however you think about it, a certain level that you need in your business; above that, you will return? And then lastly, just in terms of the sales rate. Bovis always had a slightly slower sales rate than some of the peers. Then it was about making sure you've got the product right and not necessarily pushing things, but that selling rate now does differ from the peers still. I'm just wondering if there are any ambitions to maybe turn up that build rate to drive that selling rate more in order to get up to the 8,000 completions in terms of Housebuilding but also in terms of your ambitions on partnership.

Okay, I'll take the Homes England one, where we've got grant direct from -- or secured grant direct from the government for just under 1,500 units over the next 5 years. I think that basically will make us more competitive in the land market because we have visibility of the funds direct. And when you're out there talking to housing associations about section 106 plots, the level of grant that they come in with depends on what grant they've got available from the government themselves. Now we can actually and will be asking a number of housing associations on each site to actually bid without grant because we've got the ground, which will make them more competitive because more will bid. So we do see it as giving us visibility, that's both Partnerships and homes, of course, going forward. I think it underlines our standing with Homes England as well, the fact that we are the only housebuilder, [ publicly listed ] housebuilder, to get that grant, but I think it will make us slightly more competitive in the land market. On the capital allocation...

So on the capital allocation strategy. So we've said moving to a 2x dividend cover, so accelerating from what you would have expected, 2.5x, but then excess capital to be returned. And you should expect some excess capital in due course. In terms of how we're looking at it, look, we're running at average net -- month-end net debt of GBP 125 million this year. We're not uncomfortable with that level, and therefore we are comfortable to run with some form of average month-end net debt. Looking further forward in terms of the parameters around that capital allocation strategy, we'll be looking more at a total gearing level. So look, if I take one extreme, if look at last year: We were 40% to 50% geared at one point with our land creditors. Not looking to get anywhere to that level, but we weren't uncomfortable at that level through last year. But actually, in terms of looking at excess capital, we'll be looking more like a 10% total gearing of that cash and land creditors position. And clearly we will be looking at our forward forecast at that point, and we will sign post when we feel we've got that excess capital coming.

And then on the actual sales rate, do you want to take that, Graham?

Yes. So I mean, as we've said, Glynis, I think we've got a -- we've seen a stepped increase. So you're quite right that both Bovis and Linden were at a significantly lower build rate. So the rate clearly buoyed by a strong market, as I said, and we're very pleased. So I think that is that -- we feel that's a good new normal for Vistry and so -- and I think that's improved by our product ranges, which we're really pleased with. We've refined both of those, Phoenix and the Linden Collection. And also we're definitely seeing an improvement from our hub method of selling, which the teams really seem to be relishing; and that's working well for us. So yes, the 0.76, it's a blend of both Housebuilding and Partnerships. We certainly wouldn't see that as a ceiling. We're happy with the increase, and yes, I would think we could push that further, Glynis.

But we're delighted with 0.75 in the year-to-date. Week 34 is a dramatic improvement on where we were. For the last 4 weeks and 8 weeks, we are in line with the sales rate that we achieved this time last year, which had the bounce-back from the lockdown, so we're pleased with that. We're still predominantly houses, not apartments. We're still predominantly outside the city centers. And we are at the moment turning down bulk deals because we feel happy not to give away discount and sell units in a straightforward manner to individual purchasers. So -- and we can do that because, frankly, we haven't -- got hardly any stock around wherever you are in the country, so -- but I think we should concentrate on the positive. That sales rate is dramatically above anything that Bovis or, for that matter, Linden managed to achieve.

And can I just clarify that, your selling rate, when you have dual-branded sites, you're treating those as 2 different outlets? Or you're treating that as 1 outlet combined.

Treating that as 2.

We treat it as 2.

2 different outlets. And that is working -- the dual branding, as per our strategy at the time of the acquisition, as per all the strategy ambitions that we had at the time of the acquisition, is all absolutely going according to plan, if not better. Thanks, Scott. Thanks, Glynis.

Our next question is from Will Jones from Redburn.

3 as well from me, if I could, please. The first was just coming back to [ the new sort of build ]; and just to what extent -- how you're managing the challenges there; and when it -- when you think about production, how you measure it; and whether you can just provide us with how you see build rates, how you see equivalent units, anything that would assist us there; and just generally whether you're building in line with sales rates. The second was around materials. When you think about the -- I guess you've made a reference to the fixed-price deals that you've had in the business that was -- many were struck at the time, I think, of the acquisition. Is there a risk, I suppose, when we look to second half of next year, that they roll off and there's some catch-up that lies ahead of you to market prices? Just how we think -- should think about that item that's obviously protected you so far. And then last one was just around JVs really, [ the fact that I was ] intrigued by the comment in the release that you're becoming -- you expect to become less reliant on those, I guess, as the balance sheet improves. Is that just Housebuilding, or is it Partnerships as well? And just again, any numbers around that? And, I guess, why it's happening.

Okay, on the third one, the JVs, that's predominantly come from Linden because Linden Galliford didn't have a balance sheet and had to do an awful lot of schemes, including quite small ones, in a JV to enable funding to take place. So we will be stopping that. So that doesn't mean we won't be doing JVs with certain partners. We absolutely will, but our reliance on doing them, it will be on our terms when we want to do them or, i.e., somebody introduces a site to us. And that's a way of doing business that we'll go forward, as opposed to a necessity. And I would say, when we get to 8,000 units, it actually will probably add on 400 or 500 units on top of that because, of that 8,000, a good proportion of them would have been in a JV where we're only taking 50% of the revenue, 50% of the profit. So you've kind of got, when we get to 8,000, help me if I'm wrong, an additional business unit just coming from our non reliance on JVs, which is helpful. Secondly, on build, it is -- and I've been around a long time. It's the hardest time I've ever known to build a house. So in 30, 40 years. It's incredibly difficult. That said, I think we're a very good builder. We've had to change our practices. We're having to order materials way in advance of when we normally would do it. Labor is an issue on some sites, particularly in and around London with the, yes, Eastern European labor not around at this present moment in time, but we are finding ways around it. As you go further outside of London, it is becoming materials. Materials are also an issue in and around London as well but again another advantage which we didn't appreciate at the time of doing the acquisition. Today, by unit numbers, we're the fourth largest housebuilder in the country. And how we're getting over it is I'm ringing up, Graham is ringing up, Earl is ringing up our chief exec from the peer group from the suppliers and saying -- and banging the table, frankly, saying, "Do you want to upset me? Or do you want to upset Jim and Smith, the local builder down the road?" And unfortunately, they would rather not accept us -- upset us, sorry. It's the smaller builders that are going to suffer. If we were just Bovis at this precise moment in time, we would be struggling a great deal [ let more ] than we are at this moment in time. Even this morning, the Jewson announcement that's come out about shortage in materials, that's because the major suppliers are diverting more to people like Vistry, no doubt Barratt, Taylor Wimpey and Persimmon, than going through the merchants. So this is a major issue for smaller contractors and housebuilders. It's, of course, a big issue for us, but it's an issue that we are -- thanks to our fantastic commercial procurement and site teams, we're getting over it. We are, technical term, ducking and diving, finding different ways of doing it. We're getting around it. So we are building in accordance with our sales programs. And I'm not hearing anything from partnerships, where we are building to contract with housing associations, that we're not building in line with that contract because we're not seeing any liquidated damages come through. So we're getting there, but I wouldn't want to hide it is bloody difficult. On inflation. We've seen, I'd say -- we, as in Vistry, have seen inflation of about 5%, build inflation, so far this year. That's materials and labor. I'll come back to -- I think, underlying, that's probably more like 7%, but we, as you said earlier, Will, protected ourselves at the time of the acquisition with some large bulk deals being put in place for up to a couple of years. Those deals come to an end at the end of this year, start of next year. So there is a risk around what happens there. Personally speaking, I think labor issues will become more prevalent in the next 12 months. I think material issues will sort themselves out and come back. As the material issues sort themselves out, I think that hype in the prices will come back a bit. So I wouldn't be at all surprised in the next 12 months we didn't see some deflation, not back to where prices were in January but some deflation from where they are at this precise moment in time because we are paying a premium and glad to be paying a premium to get those materials. With regards to sales inflation, we've seen, as we said in May, about 3.5% sales inflation. Of course, that's [ probably ] the gross figure, as opposed to build inflation is on pretty much half of that, if you like. We've also -- to give everyone comfort -- because these numbers that we put out today are quite comfortable. We've also put our prices up by a further around 2% to 2.5% across the country. We've done that in July. Those prices seem to be holding, but we haven't included them in our forecasts as yet. So we do have a fair bit of protection for any further hikes that may or not come along, but we believe and are predicting -- we're not predicting in our forecasts but believe that material prices could well come back a bit as these issues sort themselves out but to be offset, I think, by labor probably going up a little bit. [ Okay, Will ]?

Great.

Thanks, Scott.

We now have our next question from Dean Grant from Bank of America.

Great. And obviously congrats on the results. Just 2 questions from my side. The first one is just -- can you hear me properly...

[ Sorry, Dean ]. We've just had a fire alarm. Are we -- is that all right or not?

Okay, Dean, please, if you just repeat your question. Sorry. We just had -- the fire alarm went off. So Dean, if you could please repeat your questions...

Sure, sure...

[indiscernible] when we feel that we're about to get a difficult question. So we're...

Well, exactly. It's perfect timing, exactly that. So the -- so my first question is just on Partnerships and obviously very strong delivery in H1. And obviously you outlined your revenue target of GBP 1.6 billion over the next 5 years and your medium-term operating margin target getting to 12%. Just a question about timing here beyond 2022 and that above-10% operating margin target. How should we look at 2023, '24? And then maybe just a clarification on the 5-year outlook for the GBP 1.6 billion: Is that taking January 2020 as a baseline? Or also how do -- just to understand how I should be looking at that. And then the second question is just about Help To Buy. I know that was 25% of your sales and obviously with the scheme coming to an end in 2023. Just to maybe understand what sort of steps and precautions you are putting in place at the moment just in anticipation of that. And then maybe just any thoughts around that at the moment would be great.

Okay. Well, on Help to Buy coming to an end in '23, we're quite relaxed. We'd like it to carry on. And of course, it may very well, but we're quite relaxed. heylo, the Home Reach scheme, is out there not just for first-time buyers. That is definitely an alternative. The mortgage indemnity scheme, Newcastle Building Society, which we're trialing, is definitely one out there that could possibly help fill the gap. First Homes that we are trialing at the present moment in time with the government may very well help. So we think there's a number of schemes out there. We think the mortgage market is probably as good as I've known it, up to an 85% loan-to-value basis. Of course, it gets not so good as you go above 85%. In fact, new build is pretty much the only place you can get a 95% loan-to-value mortgage through Help to Buy, as it stands; and heylo, the Home Reach scheme. So we think more schemes will come through. And we've still got up to March, April 2023, so I think we're pretty relaxed. And we haven't seen any real impact on our sales or sales rates since the change in Help to Buy, going from 600,000 [ down to ] first-time buyers in March, April of this year. So sat here today, we're quite relaxed about that. On the Partnerships GBP 1.6 billion revenue over the next 5 years. We just -- I think you should just take it as a kind of 12% compound growth year-on-year to get to that kind of number. I will be very disappointed if we didn't get to at least 10% margins, operating margin, in 2022. I think we'll be knocking the door in the second half of the year we're currently in, 2021. So that should be very, very achievable. And that was the target we put out there at the time of the acquisition. I think the 12% operating margin will come ahead of getting to the GBP 1.6 billion. So the 12% operating margin, as we get into more and more mixed-tenure development, where of course we are way ahead of 12% operating margins, that will come through. So I don't know if you want to come off the fence, but I would say the 12%-plus operating margin, probably 2014, 2015, ahead of 2016 for -- 2026, sorry, for the...

'24, yes...

Yes, '24, '25 with the 12%; and the GBP 1.6 billion, kind of 12% compound growth from now, 2026.

I think the key there is that the market is there for us, Dean, and this is about us controlling and managing our own growth. As we said yesterday, we're happy with the progress of our newest business unit in Thames Valley. We've got -- we're well on with plans to open 2 further business units. And this is about us growing in a controlled way but as fast as we can to meet this burgeoning market.

And not forgetting, do you want to mention the larger sites that you touched on yesterday as well?

Yes. I mean very importantly obviously, and this is the strength of the combination coming through, we really are now highly competitive on these large site acquisitions. We, I mentioned Great Haddon. You have 1,500 units. Kenilworth that we closed on just 10 days ago, another 620 units. So we are -- because of the model and the ability to combine the different traditional model of Housebuilding with the high-return model of Partnerships, we are fiercely competitive at those levels. And that obviously underpins that growth; as well as the performance of our own strategic land team, who are now delighted not just to have a traditional Housebuilding business to supply but also this fast-growth, high-return Partnerships business, which really adds just a whole another string to our bow in strategic land.

And just another thing on that, on the larger sites like the Kenilworth one, for instance, that Graham was just talking about, would you like to say what -- how is that being funded, Graham? I mean, what's the return on capital?

So it's actually being -- we're in joint venture with Warwick District Council. And they are providing the vast majority of the funding for that development, so they're lending into the joint venture.

[ And ] pretty much all of it.

Pretty much all of the funding coming through Warwick District Council, so it won't surprise you that our return on capital on that site is very high indeed.

So just going on a bit further. That is a prime, prime, prime site that Bovis, Linden would no way have even bothered bidding for.

No.

So we bid for it with Bovis and led it with Partnerships. And 620 units in a great, great location; Warwick District Council, who are funding the whole of the acquisition, over GBP 60 million, but we were able to pay that very strong with not very much deferred because we were -- we have the facility to be able to do that, which was another edge we got. And the return on capital is very good, as Graham said, and it's over 90%.

Our next question is going to be from Gregor Kuglitsch from UBS.

Can you hear and see me?

Yes.

A few questions maybe and just sort of follow-ups. So on the volumes, can you just maybe elaborate a little bit perhaps on this year and then the sort of 8,000-unit target for the housing business? Sort of perhaps the trajectory towards that path. And how much of that is JVs? I think you hinted that it's 500 less than before, but I'm not sure I know what you saw the prior year number was, so perhaps some absolute figures would be nice. And sort of on a similar vein, I noted your sites did drop pretty considerably, I think, in the first half, so I guess the question is, in order to get to that 8,000-unit number, what kind of site levels would you have to grow back to, I guess, to support that kind of growth? Maybe one, second question, which is a simple one. In terms of the guidance upgrade, can you just tell us what changed? And maybe there's bits to it everywhere. Or maybe it's sort of margin, volumes and perhaps some other stuff, but if you can just perhaps break out, what sort of changed compared to a few months ago? And then finally, on the gross margin and the land bank, I think you said in your response to a question a minute ago that further price increases have not been baked in. I think the 2%, 2.5% that you put through. Can you just confirm what your assumptions are in that gross margin at land bank, which I think is a bit shy of 25%? And perhaps also how the sort of new build standards on Part L and so on feed into that. So what -- essentially what's assumed in that appraisal margin?

Okay, I'll take the last one first. And so the margin in the land bank, that includes for all price increases to date that we've seen during the course of this year. It doesn't include for the 2%, 2.5% price increases that we put through across the board pretty much in July, which are holding. So that gives us some comfort. It does include our detailed assessment of what Part L will cost, which comes in from June 2022, with a 12-month transitional period to June 2023. So we have covered what we believe are the costs for a 2-, 3-, 4- and 5-bedroom house for Part L. We've covered build costs right up to date. We've covered sales inflation up until July. We haven't put in as yet, because we want to see how things pan out, give it another month or 2, any further price increases that seem to be holding up, but -- not seem to be, are holding up very, very well at this precise moment in time, but we're only 2 months into that. And if I then go back to the third question and then I'll hand over to Earl: Profit changed in the last few months. We're always pretty -- the first big thing is we're always pretty cautious. So under-promise, over-deliver is where we all are. We're 3 or 4 months further on. We're pretty much -- well, we're 96% sold. That didn't include the weekend, but I would suspect, if we didn't sell another house, we would get to the numbers for this year. So we are virtually there. So it's just seeing how the market has gone; seeing how materials, labor shortages have gone. The risk for the year, which we've built in, will be the [ odd ] unit going back into the following year because of build issues, not sale issues, but we don't think we're really going to see too much of that. So it's just further on in the year and more confident. With regards to the volumes and the JVs, 8,000, Earl?

Yes. So Gregor, we're -- in Housebuilding, 6,500 homes is what we've said for the current year, and that's where we're at. We are...

How many of those will be JVs?

It's roughly the same proportion as last year. And we've had and we've given a bit more information on the JVs in the half year. So assume a similar proportion at the moment. We're looking at controlled growth, very much focused on margins. So looking to improve that margin into '23. So we're looking at low single-digit growth into next year but then looking to move on. And you can take something like a 5% growth then out over a 4-, 5-year period to get to the 8,000. And what -- as Greg alluded to, what we can see is squeezing that number of JVs so, at the end of that 5-year period, we'd have the equivalent of a business unit, 600 extra units being 100% attributable to the Vistry Group rather than in joint venture. Gregor, you also mentioned site numbers. I actually think, if you're picking up the site numbers a year ago, that's probably the odd number to some extent. I think, with COVID, we had some sites that were still open that we wouldn't normally expect to because of what was happening with sales. So we are comfortable with the current level of outlets. We do expect that to grow through the second half. And everything we talked about, dual branding, running -- driving the sales rate, means that we can grow our outlets in a similar way to those volumes I've just given you and get the benefits of the larger group coming through to hit the 8,000 over time.

And I think the only other thing to say on the 8,000 is that can be done from our existing base of 13, 5-star of course, business units. So we don't need to open up any or go into any new regions to get to that 8,000.

Okay. So just to be -- just to confirm then on the JV contribution of that. I guess perhaps we can leave that then broadly flat at whatever, I don't know, 800, 900 -- 800 to 1,000 units. And essentially the growth comes from the wholly owned business.

[indiscernible].

Yes, but over a 4-, 5-year period, Gregor, you should be declining in Housebuilding that contribution to JVs and assume more is 100% Vistry.

Our next question is going to be from John Fraser-Andrews. John seems to have dropped off, so we will go to our next question, from Clyde Lewis from Peel Hunt.

I think I've got 3, if I may, although the first couple are probably around the third brand that you flagged up and, I suppose, the implication for the larger sites. I mean clearly you're only going to run 3 brands on large sites, and -- but I suppose I'm looking at trying to sort of understand how quickly you [ might ] shift to more larger sites coming through the sort of portfolio over time. That was the first one. The second I had was really around the demand profile in Partnerships; and how that's evolved with local authorities, councils and, I suppose, the sort of PRS-type model. Have you seen any sort of shifts as to where the demand is coming from? And I suppose, particularly around [ the HAs ], have -- has there been a sort of shift away from some of those looking to build new houses, as opposed to spending more time and effort going through refurbs, where obviously politically they've come in for a fair bit of flak in terms of the quality of the stock that they've got?

Okay, I thought that was only 2, Clyde, but that's close enough. Well done. And do you want to take both of those, Graham?

Yes, happy to do that. So yes, you're exactly right, Clyde. I mean the real driver for that third brand is where we've got the larger sites. And so naturally the Housebuilding business will be operating on at least a couple of outlets and therefore using the Linden and the Bovis brands. And we want Partnerships absolutely working on those sites. They will -- they continue to face their HA and local authority clients as Vistry Partnerships, but we want a third brand which will probably be that kind of value offering to sit alongside on those larger sites such as Great Haddon which I talked about in the presentation. A lot of work are going into that right now, and we will be kind of finalizing our proposals for that over the next 6 months. You asked about the pace at which we're moving to these larger sites, and we've really been pushing on that since day 1. So there are a number of sites already in the portfolio which came largely from our excellent strategic land sourcing, and we're actually sharing those already. So we've got sites down in Devon. And we've got a significant one in Salisbury; and indeed North Whiteley, where I think we might be taking you on the Capital Markets Day, where we've already got both of the businesses actually operating on those sites and really starting to accelerate the pace of -- at which we're bringing those through. And then as I've said, we're now out in the market and highly competitive on acquiring more of these larger sites, so I think you -- it will be a very rapid progression on to those larger and complex developments. And that's -- that comes back to that pressing need for that third brand...

It does make life easier doing more larger sites overall for our business units than lots of smaller ones.

Yes, exactly right. And then you asked about the demand profile in Partnerships. It's a good question. I mean overall we're seeing that demand increase from housing associations and from local authorities; and massively in the PRS sector, which is just going gangbusters. And you make a good point about the pressure on housing associations to address their stock. And undoubtedly, they're having to think very hard for that and divert some resourcing into the maintenance and improvement of their existing stock, but it's not really diminishing the appetite that we're seeing to join with us in new development. I mean the need for the -- for new stock nationally and the pressure on them to bring that forward is significant. And obviously the benefit to their own financial models of the development model is strong, so we're not seeing really a diminished appetite, far from it, from any of our larger housing association development partners.

Graham, can I have a follow-up and just sort of ask around, I suppose, the sort of percentage of large sites that you're currently at, in terms of how you define them and how you see that shifting over a 3- or 4-year period, I suppose? And that third brand, would it ever get to be 10% or 15% of total volumes? Or would it only ever be a sort of very minimal number?

No. I could see -- I could definitely see -- I mean, Clyde, we're still in the early days of how we use that brand. And that's a science, which we've got some very clever people working on that, but -- so you don't want to hear me on that...

None on this panel...

None on this panel, but -- we need [ Debbie ], but no, the -- in reality, Clyde, I could easily see that pushing up to above 10%, 10% or 15%. Yes, I could. In terms of proportion of larger sites, I mean, it's -- so it's low at the moment. I could name, list those sites. There are probably 10 or 12 in the portfolio out of our total, but that's going to increase. I would, I mean, yes, put a number on it, but I would say you could see treble that number over the next 2 to 3 years. And increasingly, that's our focus for our land acquisition because, as Greg said -- exaggerating to make a point, but we'll put as much hard work and effort and time into acquiring a site for 75 units as we will one for 600 units. And therefore, it really makes sense for us to focus our efforts there and because there's less people that can compete for those sites. That's the real excitement of something like Great Haddon.

They're less competitive. Larger sites continue to be less competitive. And where we have got the angle of partnerships coming in and we can get a partner in that will forward fund it as it were, it means we can offer better payment terms than we would on our own. So we can get to the levels of price that we need to buy the site in the first place, but on something like Kenilworth, we were able to trump everybody else by offering the majority of the money for the land upfront because we had a partner who was prepared to do that.

Okay.

So it's quite -- yes, it's quite -- it's a pretty exciting time on the larger sites for us. Thanks, Clyde.

We're going to go back to John Fraser-Andrews from HSBC.

If at first you don't succeed, try and try again, John.

[indiscernible], John.

Great, yes. Got the technology working finally, yes, so I'll have 3 as well, please. So the first one, could you explain the economics for yourselves of the Deposit Unlock Newcastle scheme? The second is on Housebuilding margin. The statement refers to some more optimization in those margins. You obviously had a good recovery in the first half. You've set out so that you can do 23% next year, so what's going to take it to the land bank gross margin in the near 25%? What's still to come from the merger possibly? What's still to come? What land are you [ using that you will be using ] in the future? And then the final one, please, on the land market. Perhaps you could set out, Greg, where that current market is. And are you able to push your gross margins ahead of what's in the land bank given these large sites? And your land portfolio currently, is the plan to keep hold of all these large sites or to sort of trade them and get some more outlets to drive the volume?

So last point, John, on the larger sites. We haven't sold a piece of land for a long time. We sold one piece of land, but it was a swap. And that's the way we're going in the first half. So I don't particularly want to sell any land outright. I'd rather swap and have an additional outlet which will in turn drive volume. What was the...

[indiscernible]...

The actual land market. I would say it's the last 6 months have been -- it's -- in historic terms, it's still a very good market for us, but I'd say the last 6 months have been more competitive than the previous 12. And I think the main reason for that is we've gone through a pandemic during 2020, with the lockdown, and I think a number of our competitors didn't buy any land. We continued to buy land through, rightly or wrongly. It's turned out to be rightly probably, but a number of our competitors or peer group didn't. That's fine if you come out of the lockdown, out of the pandemic with that market. And it's the same with materials, as per previous questions, that just trundling along, but what's happened is the market has hit the ground absolutely running. So our peer group are under pressure to actually catch up and buy the land that they didn't buy in that 6 months. And I think that's the main thing that we've seen with regards to the land market. So hopefully, that will settle down, but I wouldn't get carried away. I still think the land market has been pretty good. We've been able to get in there. With regards to margins, our hurdle rate is 25%. The average margin we've bought land, the just under 6,000 plots, in that 6 months is just under 26%. I don't think we can push that on at the moment because, don't forget, since March, we've included 4 Part L costs in total within our land acquisition. So for instance, we -- a 3-bedroom house, we've included an additional GBP 3,000 worth of costs; and upwards -- less for a 2 bed, more for a 5 bed within the land appraisals. So the landowner is suffering that loss but, of course, gaining a little bit from the house price inflation that we've seen so far. So I think that answers that. Earl?

Well, I'm -- well, I'll just pick a bit more on margins. So Greg has already mentioned, obviously, Housebuilding, 13 business units can deliver up to the 8,000 units. So certainly, our operating margin, there are still benefits to come through in terms of the structure of the group. And also we've said this morning, in terms of strategic land, we can see a pipeline of 4,000 plots a year to transfer into the consented land bank. That tends to be higher margin. It also feeds -- they are -- tend to be on average larger sites, so certainly feeding the [ jewel ] or even 3 national brands in the future. You then asked about project unlock, which looked a fairly simple mortgage indemnity scheme: There is a small charge, less than 3% initially, of which half of that charge may come back in the future. In the first instance, we're going to assume that as a cost, and hopefully, some of that will come back down the line. Early days yet in terms of that trial with Newcastle Building Society.

But it is being rolled out around the country a bit more now with Nationwide, isn't it?

It's going wider, yes.

Early signs are hopeful with that.

Just -- great. So just a quick one on land: You're above your target current landholding, so what does the shape look like? Do you continue to invest to establish the sort of stronger volumes you're looking for in the medium term? Or can you take your foot off the pedal now on land investment and we see more cash coming through?

No, we won't take our foot off the pedal, but we're not under any pressure to go rushing into buying land in any particular area, where you quite often would make a mistake. So we're going to continue as we are. We're going to continue with the current profile, not take our foot off the pedal, but at the back of all of our minds, we have got a bit of breathing space.

There -- our next is to -- is Rajesh Patki from JPMorgan.

Yes. Can you hear me well?

Yes.

Yes.

We can now.

Great. I've got 2 questions, please. First one is on the Housebuilding business. You reported about GBP 40 million operating expense for the first half. And I think you touched upon this briefly earlier, but do you think the GBP 90 million from last year is a good level for the business this year and going forward? And secondly, on build cost inflation, you mentioned an underlying level of 7%. I might have missed that, but can you clarify what has brought this down to the 5% level?

Okay, I'll take the second one. And we might need some clarification on your first one. So what's -- we think the underlying cost inflation over the first 8 months of this year was about -- is about 7%. We're at 5%. And that's because, at the time of the acquisition in December, January 2020, we put in place 128 kind of volume deals with all of our major suppliers. Some of them were 12 months, but an awful lot of them were for 2 years. So we've been protected with the increases that have come through to the general marketplace. That's why we're at 5%, but we could easily see that being 7%. With regards to your first question -- did you understand that?

Well, I think, Rajesh, you're asking about the overheads in Housebuilding which were GBP 40 million for the first half. And we...

[indiscernible] [ 19 ] on it. Anyway, okay.

Yes. So look, it's a reasonable guide in terms of those overheads. The one thing that I'd almost like to think might be a bit higher in the second half is -- if you follow through with performance, there will be a bit of incentives to pay to our staff in terms of delivering it, so that will be the bit of flex in there. And then not too much growth in it going forwards because we've already got the 13 business units to deliver the growth.

So our next question is going to be from Chris Millington, who's from Numis. [Operator Instructions]

Well done on the results.

Thank you.

A few for me. I think most of mine have been taken, but can I just ask firstly on are you seeing any pushback from valuers at the moment on the price increases? And what's the preponderance of down valuations? Second one is just really about any kind of regional or product variation as you've had it through the summer. And then the final one is just a point of clarification really, and I think this is for Graham. It's the new regions in partnership you spoke about, Graham. Is that in addition to the Midlands and the South East region? And what would that new regions be required to get to the GBP 1.6 billion? Or is that kind of over and above what you're doing already?

Do you want to take that, the last one?

Do you want me to deal with that? I'll take that last one, first, Chris. So the -- we mentioned the new regions we talked about, obviously Thames Valley already in operation and that will contribute from next year. And then we're well on with looking at the regional opportunities, and that's what I mentioned in the presentation. So in particular, South East, which is in fact -- and we'll incubate that in our -- so we've got our London business, which is obviously split into 2 with development and contracting, but there's a huge pull for that business sort of to the East and in Kent and a bit in Essex and also pushing down into the South East as well. A great thing for us there, Chris, as well is we're able to work very closely with the Housebuilding businesses. So it's not like we're going out with huskies and sticking a flag in the ground. We know the subcontract chain. We know the market, so that's really helpful. So that will be in -- that's we're looking at new business unit for the South East. And in the Midlands, we -- you're quite right. We already have 2 successful business units there, but simply the volume of demand that we're seeing will justify us putting a third business unit into the Midlands. In terms of the totals, those are not over and above the GBP 1.6 billion that we've talked about. Those will be an integral part of getting to those targets that we've talked about.

In regards to down valuations, Chris. There was the odd talk a bit -- the odd down valuation in the first part of the year, January, February. And then there was the odd murmuring here and there when we put prices up across the board in July, but -- and it was the -- only the odd. In the last month, in all of the conversations I've had, which are weekly conversations with managing directors of the business units, I can't remember the last time someone mentioned any issues with down valuation, so -- and that's coming through because, as I said, we were being very cautious with the price increases in July not including them, but that is cautious because we're 2 months -- more than 2 months in now and they are holding. In actual fact, we're probably doing a little bit better than that. So I think, yes, down valuation is very little. And I've forgotten the first question.

[ Sort of ] regional variations.

Yes, regional variations. I would say it's pretty strong everywhere, but probably lucky for me personally, I think the strongest area is the South West. I think Devon and Cornwall, I don't know if either you will disagree, have been the strongest market because that's where everyone wants to live, of course.

[indiscernible].

And any discernable difference between product type, whether large houses, flats; and maybe in terms of price inflation; or just underlying demand?

Without any shadow of a doubt -- I mean, we set out, as did Linden, our strategy of building and -- reducing our average square footage so that our [ average ] house becomes just over a 3-bedroom house and building less large 4- and 5-bedroom houses. I have to say, where we are at the moment, they're the ones that are selling particularly well, brought on by a different environment caused by COVID. So they're selling exceptionally well, but we -- I think that's a short-term thing. We'll stick to our strategy, but any 4- or 5-bedroom house that we went into this year, thinking, well, that would be interesting to see how that goes, seem to be going very, very well and getting very, very good prices. And probably they're the ones who are getting the biggest increases, I would actually suggest at the moment.

[indiscernible].

[Operator Instructions] We'll be going back to Clyde Lewis from Peel Hunt.

Back again, for my third.

Well done.

This one was around sort of Part L. Greg, you flagged the GBP 3,000 extra that you've added in, I think, for a 3-bedroom house. And Graham, I think you were talking about it in your presentation as well. In terms of the -- that extra cost, where do you think the bulk of it will go? I mean, is it going on more insulation, bigger cavities? Is it the ground-source heat pumps now? Do you think that's going to be the main driver? Is it going to be solar PV, or is it going to be something else? I'm just intrigued as to the sort of research and the areas that you think...

[indiscernible].

[indiscernible] -- a big part of it is the additional insulation. And of course, we're unsure as to what's going to happen. We're also including for electric charging points at somewhere between [ 500 and 750 ]. So it's a huge additional cost, but nevertheless, before March, we were including in our appraisals. So we've actually been including in our appraisals for probably about a year now, but we took another look at it and increased the -- our allowance for Part L in March. And that's obviously, as with all building regulation changes, ever since these things started, the landowner will have to pay the burden of it. The only way the housebuilder gets caught is on the land -- is on their land bank where it's a [ long ] land bank where they haven't bought the land with a change coming through, but at the end of the day, we're going to be able to manage this up until June 2023. So a lot of our land bank isn't affected by it, anyway, because we can bring units forward. We can put foundations, et cetera, et cetera in, but we've allowed that in the land bank. But yes, GBP 2,300, plus electric charging point, for a 2-bed; up to GBP 5,100 for a 5-bedroom house. So that -- which again I think shows you a heat -- [ and heat source pumps and a heat source pump ], but the insulation, trying to get the standards right for a 5-bedroom house, which is generally going to be detached, are a lot harder to do than a 2- or 3-bedroomed semi or terraced house.

Thank you. We have no further questions, so I'd like to pass back to Greg for closing remarks.

Okay, thank you very much. Hopefully, you all watched the video. We're really pleased and proud of those first year (sic) [ first half ] results. We're in great shape going into the second half of the year. And the strategy of the acquisition of Galliford Try's housing businesses is absolutely coming through more than we originally anticipated, no doubt helped a little bit by the pandemic which has definitely shown up the acute shortage of affordable housing. And I do think, going forward, the timing of the acquisition of the Partnerships business particularly will be seen as very, very good. On that, thank you very much.

Many thanks.

Thank you.