Industry response to The Barker Review

Peter Johnson

Chief Executive, George Wimpey Plc

Merrill Lynch Housing Market Conference

Friday 23 April 2004

Agenda

Summary of key recommendations

Impact on housebuilders

Implementation and reality

Challenges for the industry

Summary and Conclusions

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Key recommendations 1

OutputHousing output needs to increase significantly to meet demandAffordability should be a key criterion when setting housing targets

PlanningPrime responsibility for housing decisions should be at the regional levelAdditional planning routes should be available to housebuildersRegions should be able to diverge from PPG3 where appropriate

Government fundingLocal government should receive greater financial gain from new

housing developments, so the benefits better match the costsGovernment should finance “pump-priming” infrastructureGovernment needs to increase funding of “sub-market” housing

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Key recommendations 2

TaxationA planning-gain supplement is the best way to tax land “rent” profitsAlternatives, such as VAT, could have perverse effects on land supplyThis new tax should partially replace S 106 agreements

Requirements on industryThe industry must improve customer satisfaction significantly The industry should work to increase off-site prefabricationAnd increase the number of apprentices and training generallyAnd work with CABE on a code of best practice for external designLocal Authorities should set conditions to increase build rates on new

sites

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Impact on housebuilders 1

Output If fully implemented, today’s constraints on growing volumes will be lifted Steady growth in volumes will underpin earnings growth for largest companies

PricesIf supply responds to demand, prices should become more stableEven a limited supply response would stop price increases being a one way bet

Land marketAs prices moderate and land supply improves, land prices will rise more slowly

Profits Margins are likely to stabilise or converge to “normal” levels over timeHowever volume growth will enable profits of the efficient producer to grow

CashMore stable land prices will lead to significantly higher cash generationThis should increase economic value added and hence earnings multiples:

valuations should become earnings-driven rather than assets-driven

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Impact on housebuilders 2

Land banksToday, competitive advantage comes from holding long land banks With more responsive supply, holding gain much reduced - < cost of capitalLand banks will be held for operational need, not for financial returns

CompetitionBarker’s vision is that competition will be based on delivery of superior value to customers at lowest cost: a normal competitive industry model

Operating strategiesSuccessful operational strategies will become

delivering superior customer satisfactionat lowest total coston developments that meet modern “standards” of design

Industry consolidationBenefits of scale will increase whilst limits to scale will reduceAcquisition remains an alternative to organic growth to deliver profit growth

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Implementation and reality

Obstacles to implementationLimited regional government infrastructureSize and complexity of the South East RegionNeed for a political consensus on

roles of regional, county and district planning bodiesintroduction and rate of a planning-gain supplement

Approach to implementationExtensive industry consultation plannedConservative Party conducting policy review

Realistic timeframeImplementation unlikely until after the next electionIndustry needs to get on and address those issues within its controlIndustry mindset will change, and hence strategies for volume growth

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Challenges for the industry 1

Increasing volume growth ratesNeed to create organisation structure and processes which support growthGW: flexible organisation plus two brands will support volume growth

Lower house price inflationLower house price price inflation will increase exposure to rising costsGW: scale and focus on “best practice” processes ensures tight control of costs

Pressure to increase build-out ratesThere will be pressure to increase selling and build rates (from ave c0.7 a week)GW: already builds at 1 a week (highest in industry) - efficient build processes

Meeting customer needsIndustry must raise average “willingness to refer” from 46% to 75%GW: achieved 85%, Laing Homes 70% in 2003; all management bonused on “willingness to refer” ; rigorous benchmarking between GW, Laing Homes and Morrison 8

Challenges for the industry 2

InnovationIndustry must demonstrate embrace of prefabrication: many examples in place, but to date these lack benefits of scaleGW: uses prefabricated components wherever possible and timber-frame where appropriate; in discussion with Universities on approach to innovation

Attracting skilled workersIndustry must increase investment in training and employ more apprenticesGW: employs > 300 apprentices; structured programme of personal development and training at all levels up to international graduate programme

Design Industry must continue to develop innovative design whilst controlling costsIndustry must demonstrate its design standards have improvedGW: no national house-types; inter-regional bench-marking enables standardisation of best footprints with flexibility of external design

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Summary and Conclusions: excellent news for the industry

The Barker Review establishes a favourable political climate for housingIt puts housing high up the political agendaIt confirms the obstacle to meeting housing need is the planning systemWhilst implementation will be slow, the volume “risk” is now on the upsideThe industry is absolved from land hoarding

It creates a tax framework favourable to the industryA planning gain supplement will fall on land owners rather than the industryThe problems associated with VAT are underlinedThe need to “simplify” S106 agreements is confirmed

The economics of the industry will be much improvedLower house price inflation will lead to lower land inflationWhilst “stock gains” will be reduced, cash generation should greatly improve This should lead to higher EVA and hence higher multiples

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Summary and Conclusions:and excellent news for George Wimpey

The Barker Review also requires changes in the industryIts objective is that competition should be based on delivering superior customer

satisfaction at lowest cost: most business models need to changeThis will enhance the benefits of scale, whilst reducing the limits to scaleThere will be winners and losers based on speed of adaptation to a new world

Different operating models and efficiencies will affect relative valuationsRelative values will reflect ability to win under the new model rather than just

length of land banksLong land banks will not produce a return above the cost of capital

George Wimpey is well placed to benefit from these changesWe already achieve customer satisfaction scores well ahead of the Barker targetOur fast build rate and organisational model gives us low production costsWe have established a good reputation with CABE and others for innovative

design and forward-looking vision

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Industry response to The Barker Review

Peter Johnson

Chief Executive, George Wimpey Plc

Merrill Lynch Housing Market Conference

Friday 23 April 2004