UK homebuilder Persimmon employs a distinct strategy of buying land in less desirable areas with less competition. This results in significantly lower land costs (11-12% of revenue vs. 20% for peers), driving excellent margins and historically superior returns on capital.
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Unlike the pre-2008 era, the UK residential land market is now more rational due to industry consolidation and disciplined valuation models. This reduces the risk of homebuilders overpaying for land and suffering massive write-downs in a downturn, making the sector safer.
UK domestic investors show little interest in their own homebuilder stocks. The primary interest comes from international, particularly American, value investors who see a quantitative opportunity, signaling a potential bottom in sentiment and a future catalyst for change in capital allocation.
Unsexy markets like plumbing or law have less competition, higher profit margins, and customers who are more receptive to expertise. This creates an environment for faster growth, akin to driving on an empty road.
While more permissive government planning policies would increase construction volumes and potentially stock prices, they also risk eroding the scarcity value of the land banks that underpin the homebuilders' tangible book value. The constrained supply is a key component of their current asset security.
High margins create stability but also invite competition. The ideal strategy is to operate with margins low enough to build customer loyalty and a competitive moat, while retaining the *ability* to raise prices when necessary. This balances long-term growth with short-term financial resilience.
With high interest rates freezing the existing home market, homebuilders are successfully competing by using their own margins to "buy down" mortgage rates for customers. This strategy allows them to continue selling inventory even when affordability is broadly challenged.
The primary risk of a housing price drop in the UK is concentrated in the expensive London market. Investors can mitigate this by focusing on homebuilders like Bellway, which have minimal exposure to London and operate in more reasonably priced regions.
Despite 70% of the market being controlled by HOAs, the advice is to focus on "scatter" individual homes. The HOA market is an auction where the lowest bid wins, destroying margins. By focusing on individual homeowners, the business can control its pricing, maintain higher margins, and avoid a race to the bottom.
The homebuilding business model has a counter-intuitive cash flow profile. During a downturn, cash flow turns positive as companies halt land acquisition and reduce construction spending. This frees up working capital and strengthens the balance sheet when it's most needed for survival.
Top compounders intentionally target and dominate small, slow-growing niche markets. These markets are unattractive to large private equity firms, allowing the compounder to build a durable competitive advantage and pricing power with little interference from deep-pocketed rivals.
