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Deutsche BankMarkets Research

Industry

UK HousebuildersFITT

Date

28 October 2013

Europe

United Kingdom

Housebuilders

F.I.T.T. for investorsThe London market

London - An important contributor to the UK listed housebuilders

For Berkeley we believe the London exposure is well understood. However we view the market is

currently under-estimating the significant contributions to EBIT from London for the volume

housebuilders which we estimate to reach 15-30% for Barratt, Bellway, Taylor Wimpey and

Redrow by 2015. With a significant under-supply of homes expected over the coming years, we

anticipate the London market to remain robust. As such we see those operating with scale andhistory in the region to see continued strong returns from their London divisions. Reflecting our

analysis we have upgraded forecasts and target prices and reiterate Barratt as our top pick.

Glynis Johnson

Research Analyst

(+44) 20 754-74030

[email protected]

Manu Rimpela

Research Analyst

(+44) 20 754-55669

[email protected]

________________________________________________________________________________________________________________

Deutsche Bank AG/London

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors shouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors shouldconsider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYSTCERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.





Deutsche BankMarkets Research

Europe

United Kingdom

Housebuilders

Industry

UK HousebuildersFITT

Date

28 October 2013

FITT Research

The London market

London - An important contributor to the UK listed housebuilders

________________________________________________________________________________________________________________

Deutsche Bank AG/London

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors shouldbe aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors shouldconsider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYSTCERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

Glynis Johnson

Research Analyst

(+44) 20 754-74030

[email protected]

Manu Rimpela

Research Analyst

(+44) 20 754-55669

[email protected]

Table Of Contents

Investment Thesis Page 03

The London Housing Market Page 07

Profitability of LondonHousebuilding

Page 28

Company section Page 34

Source: Deutsche Bank

Key Changes

Company Target Price Rating

BDEV.L 391.00 to394.00(GBP)

-

RDW.L 278.00 to294.00(GBP)

-

BKGH.L 2,252.00 to2,358.00(GBP)

-


Top picks

Barratt Developments(BDEV.L),GBP334.20

Buy


Companies Featured

Barratt Developments(BDEV.L),GBP334.20

Buy

Berkeley Group Hldgs(BKGH.L),GBP2,400.00

Hold

Bellway (BWY.L),GBP1,508.00 Hold

Redrow (RDW.L),GBP254.10 Hold

Taylor Wimpey (TW.L),GBP111.20 Buy


London as % of group EBIT 2015

Company name London as % of group EBIT2015

Berkeley 88%

Barratt 29%

Bellway 23%

Redrow 18%

Taylor Wimpey 14%

Source: Company data and Deutsche Bank

For Berkeley we believe the London exposure is well understood. However weview the market is currently under-estimating the significant contributions toEBIT from London for the volume housebuilders which we estimate to reach15-30% for Barratt, Bellway, Taylor Wimpey and Redrow by 2015. With asignificant under-supply of homes expected over the coming years, weanticipate the London market to remain robust. As such we see thoseoperating with scale and history in the region to see continued strong returnsfrom their London divisions. Reflecting our analysis we have upgradedforecasts and target prices and reiterate Barratt as our top pick.

New entrants into London driving its importance to the sectorWithin the UK a number of the listed developers have had long standingbusinesses in the capital city. Berkeley, Barratt and Bellway have all hadoperations in London on some scale through the past cycle. However since thedownturn a number of others have sought to build up positions, eitherreturning to London as in the case of Redrow or graduating coverage fromouter London towards the centre such as Taylor Wimpey and Crest Nicholson.Given the time taken between land acquisitions and actual completions manyof these “new entrants” are forecast to show significant growth in theirLondon operations through 2014 and 2015.

Profitability expected to remain high but some pressure buildingWith developers citing similar hurdle rates on land buying across the UK but

with the benefit of significant house price inflation since 2009 we believe EBITmargins on London sites bought since the downturn to be ahead of the rest ofthe country. For those working on small sites significant land buying will berequired to sustain volumes; land cost inflation on the more straightforwardsites may also tame future margins for the pure developer. However webelieve more sustainable profitability should be available for those who canaccess land where competition is limited by factors such as vendor access,intricacies of planning; and/or complexity of build. Companies such asBerkeley, Barratt, and Bellway we see as better positioned for sustainablemargins and volumes from London, base loading P&Ls with quality earnings.

London housing market expected to remain supportiveWith the Greater London Authority forecasting approx 34K new households pain London to 2033, and supply models suggesting build rates of 24-27.7K unitspa for the coming 10 years, a strong underbuild in the region appears possible.Therefore while house prices in the capital are back at peak levels, we believe

there is scope for mid-low single digit house price inflation on average in thecoming years. The current level of underbuild in London does not differentiatethe capital from much of the UK, and while the greater levels of housing equityhas driven London house price inflation ahead of the country in the past fewyears, improvements in LTV across the UK (banks greater willingness to lend,government mortgage initiatives) suggests that future house price inflation inthe capital may not be as strongly differentiated going forward.

Valuations and riskHousebuilder price targets are based on adjusted NTAV. Sector risks includeeconomic factors, political factors, planning, and costs.



28 October 2013

Housebuilders

UK Housebuilders FITT

Page 2 Deutsche Bank AG/London

Table Of Contents

Investment thesis .................................................................. 3

1) The London Housing Market ............................................. 7

London housing - in context ................................................. 8

Demand to remain robust ................................................... 12

Supply shortage to continue ............................................... 21

2) Profitability of London housebuilding ............................. 28

London a significant contributor to profits .......................... 29

Drivers of profitability .......................................................... 30

3) Company section ............................................................. 34

Berkeley Group Hldgs.......................................................... 36 Barratt Developments ......................................................... 47

Bellway ................................................................................ 55

Redrow ................................................................................ 61

Taylor Wimpey .................................................................... 67

Crest Nicholson London ...................................................... 74

Appendix A .......................................................................... 75



28 October 2013

Housebuilders


Deutsche Bank AG/London Page 3

Investment thesisLondon – an important contributor

Listed developers account for approx 30% of London completions

As with elsewhere in the UK, London has a significant number of residential

developers with a wide range of scale. However while the market is

fragmented we estimate that the main 5 listed developers produce approx 30%

of London new build volumes, with Berkeley accounting for approx 15% of

this. Within the market Berkeley and Barratt operate full businesses in the

region (project managing build and controlling planning and selling), Crest

Nicholson and Taylor Wimpey operate more pure developer models (ie all build

is main contracted out, sales and planning consultants are used) while Redrow

and Bellway use a hybrid of the two. Other competitors include listed real

estate companies who also do residential development, such as British Land,

Capital and Counties, Lend Lease; Housing Associations with resources to do

private development either individually or in a joint venture such as L&Q,

Genesis; unlisted local developers such as Native Land who again may take on

larger projects and smaller developers undertaking the very localised small

developments.

Figure 1: Alternative build models for the London market

Full development Pure development

Berkeley Bellway Crest Nicholson

Barratt Redrow Taylor Wimpey

Source: Company data and Deutsche Bank,

New entrants into London driving its importance to the sectorWithin the UK a number of the listed developers have had long standing

businesses in the capital city. Berkeley, Barratt and Bellway have all had

operations in the capital on some scale through the past cycle. However since

the downturn a number of the listed developers have sought to build up

positions, either returning to London as in the case of Redrow or graduating

coverage from outer London towards the centre such as Taylor Wimpey and

Crest Nicholson. Given the time taken between land acquisitions and actual

completions many of these “new entrants” are forecast to show significant

growth in their London operations through 2014 and 2015.

London is a significant contributor to revenues and EBIT

For Berkeley group we believe the London exposure is well understood.However we view the market is currently under-estimating the significant

contributions to EBIT from London for the UK volume housebuilders which we

estimate to reach 15-30% for Barratt, Bellway, Taylor Wimpey and Redrow by

2015. While this underestimation of London in most cases doesn’t imply our

forecasts to be significantly above consensus, this we see as more reflecting

our conservative expectations for house price inflation across the remainder of

the UK.

Concentration of new build in

London 2013

Number ofcompletions

% of Londoncompletions

Barratt 1586 8.0%

Bellway 950 4.6%

Berkeley 3000 14.6%

Crest Nicholson 154 0.7%

Redrow 13 0.4%

Taylor Wimpey* 160 1.4%

Total 5927 29.7% Source: Company data and Deutsche Bank, * Central London only



28 October 2013

Housebuilders



Figure 2: London completions, revenues and EBIT as % sales

2013E 2015E

Completions Revenue Est EBIT Est EBIT margin Completions Revenue Est EBIT Est EBIT margin

Barratt 12% 14% **27% **,*14.8% 13% 19% **29% **,*17.8%

Bellway 15% 19% 25% 18.0% 18% 20% 23% 20.0%

Berkeley 70% 80% 89% 22.7% 70% 83% 88% 23.5%Crest Nicholson *** 6.2% 16% 13% 15.0% na na na na

Redrow 0.4% 0.8% 1.8% 20% 6% 15% 18% 20.0%

Taylor Wimpey 1.4% 3.7% 6.8% 25.0% 3% 9% 14% 20.0%

Average 19.8% 22.4% 27.1% 20.1% 22.1% 31.4% 35.0% 20.4%

Volume housebuilders av 7.2% 10.9% 14.7% 19.5% 10.2% 18.5% 21.8% 19.6%

Source: Company data and Deutsche Bank, *reflecting the contribution of older lower margin land in the portfolio, ** inc jv*** based on reuters consensus

Questions of sustainability of London exposure

For those companies operating with full development models (ie undertaking

build, planning, sales etc) then we view EBIT margins ought to be largely

sustainable (with upside for Barratt and Bellway reflecting the trading out of a

few assets bought prior to the downturn). However we are more cautious onthose pursuing the more pure development model focused on relatively small

sized developments of 30-100 units. While these have provided a strong

launch pad into London (and to date have proved to the most extent highly

profitable), further land acquisitions are required to build on or at least

maintain this position.

Forecasts and price targets changed for Berkeley, Barratt and Redrow

Within this report we have moved forecasts and share price targets for

Berkeley, Barratt and Redrow reflecting the updates we have included

London’s contribution to the participating companies. However reflecting our

focus on valuation as well as the scope for leverage to the housing market

recovery elsewhere in the UK our top pick remains Barratt (as well as Bovisalthough without London exposure this stock is not covered in this report).

Figure 3: Recommendations, forecasts, consensus and valuation for the UK housebuilders

PBT % change Consensus NTAV/share

Name Current price DB Rec Target Upside/ (dside) % change 2014E 2015E 2014E 2015E 2015E % diff 2014E 2015E

Barratt Dev 339p Buy 394p 15% +1% 359.0 519.3 0.9% 1.2% 470.62 9.4% 1.31 1.17

Bellway 1527p Hold 1592p 4% Na 193.7 236.9 Na Na 235.4 0.6% 1.24 1.10

Berkeley Group 2434p Hold 2358p (3%) +5% 325.6 395.2 -1.2% 1.3% 369 7.0% 2.31 2.15

Bovis Homes 795p Buy 1001p 26% Na 115.9 155.4 Na Na 139.7 11.2% 1.17 1.04

Persimmon 1256p Hold 1274p 1% Na 359.7 440.7 Na Na 458.1 -3.8% 1.67 1.45

Redrow 257p Hold 294p 14% +6% 105.3 146.8 -10.4% -11.3% 134.5 8.4% 1.22 1.05

Taylor Wimpey 114p Buy 140p 23% 0% 344.3 418.8 0.0% 0.0% 459.4 -9.7% 1.47 1.30

Total/average 1.49 1.32

Total excl Berkeley and Persimmon 1.29 1.13 Source: Reuters, Deutsche Bank

Profitability expected to remain high but pressure building

EBIT margins in high 20% currently being achieved on new land

We believe that when purchasing land, developers in London are looking for a

gross margin of 20-30% and reflecting the strong house price inflation through

the past 4 years we believe that most developers are achieving the top end of

this level. With those operating pure development models where build is main

contracted out, and planning and sales is done by outside agencies admin



28 October 2013

Housebuilders



costs in many cases are low, implying that EBIT margins of 25-28%. For those

operating more full operations we believe EBIT is nearer 20-25%.

Pure developers seeing strong margins

Given the high margins achievable, the faster selling rates and off-plan sales

we believe an efficient capital model is working in London with the increasing

participation in the land market by a number of listed housebuilders (includingTaylor Wimpey, Crest Nicholson, Redrow) as well as the housing associations

(in the private development), private equity and private individuals. Within

more straight-forward, smaller sites we believe there is already substantial

competition for land, and industry participants believe that some level of house

price inflation has been factored in. To date house price inflation in London has

exceeded most industry forecasts and as such developers of these sites are

still achieving margins ahead of their hurdle rates. However we are wary of the

sustainability to margins going forward for those using the pure development

model.

We see greater sustainability from those operating full models

We see more sustainable high returns on offer to those with more full

development models in the region. This reflects our view that we believe better

margins will be available on a more consistent basis to those who can access

land where competition is less. Factors which we believe to be sufficiently

differentiating to allow a more limited competition for land include: restricted

access to land vendors – be it government, Greater London Authority (GLA),

local authority or other significant land owners such as real estate companies,

housing associations or industry partners; the intricacies of planning including

relationships with the relevant local authorities, borough officials, planning

inspectorate as well as skills and expertise in terms of issue such as ‘rights to

light’; complexity of build including issues of ground works, tall towers,

transportation in and out of build materials; balance sheet allowing an ability to

cope with land without vacant possession, to invest the significant working

capital, or to take on land which is too large for others to shoulder.

Figure 4: London completions, revenues and EBIT as % sales

Full developer

Positives Negatives

A better relationship with inspectorate to better understand what kind of planning a site may get.Allows better expertise on technicalities such as rights to light etc

Heavy cost structure even when the market isdifficult or site numbers decline

In house sales team allows a greater understanding of the demands of the customer in any one areain terms of specification and other preferences. They can also coordinate better with build timing

Big projects bought at the wrong time can providelonger drags on P&L

In house land buying teams with history should have deeper relationship with land sellers. Reputationis important for government in its land selling

In house project management allows for control of timing of delivery to fit the market. It also ensuresno negative value engineering on site and capture of build margin. Consistent presence in Londonallows greater opportunity to capture strong project managers who want a continuous work load

Pure development

Positives Negatives

Low level of resource and so strong EBIT margins ahead of those using full development model Differentiating on just balance sheet can makecompetition for land tougher

De-risked build in terms of costs which usually have maximum prices Lesser resource may lead to risks of wrongproduct and /or wrong location

Usually taking on smaller sites which allows quick turnaround Source: Company data and Deutsche Bank,



28 October 2013

Housebuilders



London housing market expected to remain supportiveForecast to grow by 33-36,000 households pa

The Department of Communities and Local Government (CLG) estimates

household numbers in London to grow by 36,000 pa to 2033, compared to the

Greater London Authorities (GLA) development strategy “The London Plan”

estimate of 34K and other industry estimates from 38K pa (Savills) to 54K pa(Knight Frank). Through the period the “The London Plan” estimates a 36K

increase in employment pa. This forecast is not including an additional

demand from overseas buyers not already living in London. As such we believe

there remains upside to these forecasts.

But supply is forecast to lag demand across London

In 2011/12 London built 20,040 homes, with an average of 20,458 in the past 5

years to 2012. While there appears to be a pickup in supply anticipated in the

coming 5 years, analysis of known developments by London estate agents

which suggest build rising to 24-27.7K units pa (Savills and Knight Frank),

remaining well short of the target from the GLA.

Figure 5: London completions

0

5000

10000

15000

20000

25000

30000

35000

2 0 0 5 / 6

2 0 0 6 / 7

2 0 0 7 / 8

2 0 0 8 / 9

2 0 0 9 / 1 0

2 0 1 0 / 1 1

2 0 1 1 / 1 2

2 0 1 2 E

2 0 1 3 E

2 0 1 4 E

2 0 1 5 E

2 0 1 6 E

2 0 1 7 E

Net market completions Net affordable completions

Current London Plan

Source: Savills

This excess demand we believe will drive house price inflation in London

With housing demand anticipated to strongly outstrip supply in the coming

years we believe house price inflation will continue in 2014 and 2015. Through

2000-07 house price inflation in London averaged approx 12% pa, though

showing considerable variation within the period ranging from -2.5% in Q2 05

to high teens growth in 2000-2003 and 2007. While we remain cautious that

the current 8% house price inflation is sustainable we believe house price

inflation of 4-5% pa ought to be possible through the coming 2-3 years.

Inflation in London may not be as differentiated to rest of UK going forward

This excess demand relative to supply in London is not significantly different tothe rest of the UK where household growth is estimated at approx 245,000 pa

and supply is estimated to reach 130,000 pa in the next 5 years. However with

a more efficient housing market (house prices in London returning to similar

previous levels creating sufficient equity to enable house moves) it has created

house price inflation in the capital, where the rest of the country has seen little

movement. With the recent increase in LTV in mortgages and the launch of

Help To Buy the government is seeking to drive the housing market for the UK

as a whole, on this basis we believe house price inflation rate in London going

forward may not be as differentiated as previous.

Please see Figure 95 for a

definition of the Central and

Prime London boroughs



28 October 2013

Housebuilders



1) The London HousingMarket



28 October 2013

Housebuilders



London housing - incontext

Household growth and the prevalence of home ownership

London has a population of over 8m, with approx 3.3m households

As of 2011 London had a population of 8.17m, growing 85,000 pa on average

over the past 10 years (a considerably higher growth than that seen in the

previous decade or the 35K pa anticipated by policy makers). In the coming 5

years the London population is anticipated to climb to a level above its

previous 1939 peak of 8.6m, reaching 8.9m by 2031. As of 2011 there were

3.26m households in London, slightly lower than policymakers expectations of

3.34m, the difference being attributed to the constraint of the level of new

build completions in the period. This data implies 2.5 people per household

against a national average of 2.4.

Demand forecast to grow by 33-36,000 households pa.

The Department of Communities and Local Government (CLG) estimates

household numbers to grow by 36,000 pa to 2033 (compared to Savills

estimate of <38K pa and the London Plan estimate of 34K and the 54,000 of

Knight Frank). Through the period the London Plan estimates a 36K increase in

employment pa.

But supply is forecast to lag demand across London

In 2011/12 London built 20,040 homes, with an average of 20,458 in the past 5

years to 2012. While there appear to be a pickup in supply anticipated in the

coming 5 years, analysis of known developments by London estate agents

which suggest build rising to 24-27.7K units pa (Savills and Knight Frank),remaining short of targets from the GLA. This excess demand is not

significantly different compared to the rest of the UK where household growth

is estimated at approx 245,000 pa and supply is estimated to reach 130,000 pa

in the next 5 years. However as a result of the efficient housing market in

London (ie more robust house pricing in the past 4 years creating sufficient

equity which reduces the impact of the lower LTV mortgages), this

undersupply has caused inflation in London (although with the recent increase

in LTV in mortgages and the launch of Help To Buy the inflation rate in London

may not be as differentiated as previous).

A higher level of private rental than elsewhere in the country

Compared with elsewhere in the UK, private rental in London is more

prominent at approximately 26% of population (ranging from 11% to 46% by

local area) compared to approx 19% in the UK as a whole and 23% in other

major cities. This has grown from only 15% in 2000. Over 60% of these private

renters were born outside the UK. Social renting makes up a further 25% (but

has been significantly higher a few decades ago) with owner occupiers filling

the remainder.

The housing and mortgage market

The level of mortgage approvals back to levels seen in the 1980s

Since the financial crisis, mortgage approvals in London have been relatively

flat at 15-20,000 loans per quarter - approximately half the number in 2007 but

Breakdown of home ownership and

rental in London compared to UK

London UK

Private rental 26% 19%

Social renters 25% 20%

Home owners 49.0% 61.0% Source: DCLG,



28 October 2013

Housebuilders



a similar level to that seen in the 1980s. For the London market there appears

to be no official data on the proportion of cash buying. However we believe

that London remains ahead of the UK as a whole which data suggests sees

approx 36% of transactions done on cash. Within the new build Berkeley

reports that up to 50% of its transactions are for customers without a

mortgage.

Figure 6: London mortgages for home buying (number) Figure 7: Mortgage lending for London by price of home

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Q 1 7 4

Q 1 7 6

Q 1 7 8

Q 1 8 0

Q 1 8 2

Q 1 8 4

Q 1 8 6

Q 1 8 8

Q 1 9 0

Q 1 9 2

Q 1 9 4

Q 1 9 6

Q 1 9 8

Q 1 0 0

Q 1 0 2

Q 1 0 4

Q 1 0 6

Q 1 0 8

Q 1 1 0

Q 1 1 2

0%

20%

40%

60%

80%

100%

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

under £125K £125K- £175K £175K- £250K

£250- £500K over £500K Source: CML Source: CML

Home movers continue to dominate the housing market

Mortgage data suggests a fairly even split between first time buyers and home

movers in London. However with over one-third of transactions we believe not

using a mortgage this suggests that home movers/second home owners in fact

continue to dominate the market. Data suggests that overseas investor

investment in London residential accounts for an equivalent of a nearly a third

of all mortgage lending in the region (and we believe is significant portion of

cash buyers). Second home buyers, ie those who buy a second home for theirexclusive use rather than renting it out, are estimated to account for 10-20% of

demand (but are accounted within either mortgage lending or cash buying).

Figure 8: Breakdown of mortgage lending between first time buyer and home

mover London

05,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Q 2 0 5

Q 3 0 5

Q 4 0 5

Q 1 0 6

Q 2 0 6

Q 3 0 6

Q 4 0 6

Q 1 0 7

Q 2 0 7

Q 3 0 7

Q 4 0 7

Q 1 0 8

Q 2 0 8

Q 3 0 8

Q 4 0 8

Q 1 0 9

Q 2 0 9

Q 3 0 9

Q 4 0 9

Q 1 1 0

Q 2 1 0

Q 3 1 0

Q 4 1 0

Q 1 1 1

Q 2 1 1

Q 3 1 1

Q 4 1 1

Q 1 1 2

Q 2 1 2

Q 3 1 2

Q 4 1 2

First time buyers home movers

Source: CML



28 October 2013

Housebuilders



London house prices

London house prices back at peak levels

Through 2000-2007 the London market saw average house price inflation of

12% pa and while through the downturn in 2007-2009 London house prices

declined by approx 28-29% (approximately in line with other areas in the UK)since that time prices have shown steady improvement and according to

Halifax prices are now approx 12% below peak. Other indices such as

Nationwide which take a more restricted definition of London geography show

house prices in London back to peak levels. This is significantly higher house

pricing inflation than the rest of the country where prices remain down 15%

from peak, with the higher house prices in London providing home owners

with more equity allowing a more efficient house market despite the low LTV

on mortgages available since 2009.

Figure 9: London house prices Figure 10: Halifax London house prices compared to UK

0100200300400500600700800

900

Q 4 7 3

Q 3 7 5

Q 2 7 7

Q 1 7 9

Q 4 8 0

Q 3 8 2

Q 2 8 4

Q 1 8 6

Q 4 8 7

Q 3 8 9

Q 2 9 1

Q 1 9 3

Q 4 9 4

Q 3 9 6

Q 2 9 8

Q 1 0 0

Q 4 0 1

Q 3 0 3

Q 2 0 5

Q 1 0 7

Q 4 0 8

Q 3 1 0

Q 2 1 2

Halifax Greater London Nationwide London

0100200300400500600700800

900

Q 4 7 3

Q 3 7 5

Q 2 7 7

Q 1 7 9

Q 4 8 0

Q 3 8 2

Q 2 8 4

Q 1 8 6

Q 4 8 7

Q 3 8 9

Q 2 9 1

Q 1 9 3

Q 4 9 4

Q 3 9 6

Q 2 9 8

Q 1 0 0

Q 4 0 1

Q 3 0 3

Q 2 0 5

Q 1 0 7

Q 4 0 8

Q 3 1 0

Q 2 1 2

Halifax UK Halifax Greater London

Source: Nationwide and Halifax Source: Halifax

Figure 11: Halifax regional house price indices, % change

year on year (%)

Figure 12: ONS house prices at mortgage completion

stage YoY change

-30.0-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Q 3 8 5

Q 1 8 7

Q 3 8 8

Q 1 9 0

Q 3 9 1

Q 1 9 3

Q 3 9 4

Q 1 9 6

Q 3 9 7

Q 1 9 9

Q 3 0 0

Q 1 0 2

Q 3 0 3

Q 1 0 5

Q 3 0 6

Q 1 0 8

Q 3 0 9

Q 1 1 1

Q 3 1 2

Greater London UK (RHS)

-20.0%-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

J u n 0 4

J a n 0 5

A u g 0 5

M a r 0 6

O c t 0 6

M a y 0 7

D e c 0 7

J u l 0 8

F e b 0 9

S e p 0 9

A p r 1 0

N o v 1 0

J u n 1 1

J a n 1 2

A u g 1 2

Greater London UK RHS Source: Halifax Source: ONS



28 October 2013

Housebuilders



Figure 13: Nationwide regional house price indices, %

change year on year

Figure 14: RICS Survey change in house price London (%

balance)

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Q 4 7 4

Q 4 7 6

Q 4 7 8

Q 4 8 0

Q 4 8 2

Q 4 8 4

Q 4 8 6

Q 4 8 8

Q 4 9 0

Q 4 9 2

Q 4 9 4

Q 4 9 6

Q 4 9 8

Q 4 0 0

Q 4 0 2

Q 4 0 4

Q 4 0 6

Q 4 0 8

Q 4 1 0

Q 4 1 2

London UK (RHS)

-150

-100

-50

0

50

100

150

A p r - 9 4

M a y - 9 5

J u n - 9 6

J u l - 9 7

A u g - 9 8

S e p - 9 9

O c t - 0 0

N o v - 0 1

D e c - 0 2

J a n - 0 4

F e b - 0 5

M a r - 0 6

A p r - 0 7

M a y - 0 8

J u n - 0 9

J u l - 1 0

A u g - 1 1

S e p - 1 2

Source: Nationwide Source: RICS

Market commentators suggest price rises in London

A number of estate agents offer a London market commentary and based on alack of supply these forecast strong price growth of approx 3-5% on average

pa from 2013-2017. This expectation of price growth varies by borough within

London. Part of the expected driver of house prices is the lack of supply of

product – both new build but also stock to sell. RICS provides data on the

sales/stocks ratio of the surveyors in London which highlights this lack of

supply. The RICS survey of sales and price expectations for the coming quarter

provides indications of the changes which are anticipated by the surveyors

valuing the homes in the region for mortgage purposes.

Figure 15: London House price forecasts

Q2 2013 2013 2014 2015 2016 2017 Annual av to 2017

Central London (Savills) 2.5% 6.0% 3.0% -1.0% 8.0% 6.5% 4.5%Outer Prime London (Savills) 0.8% 7.0% 3.5% -0.5% 7.0% 7.0% 4.8%

Mainstream London (Savills) Na 6.5% 6.0% 4.0% 4.5% 2.0% 4.6%

Knight Frank Prime Outer London na 1.0% 3.0% 4.0% 5.0% 5.0% 3.6%

Prime Central London (Knight Frank) 7.7%* 6.0% 4.0% 6.0% 6.0% 6.0% 5.6%

UK (Savills) Na 3.5% 4.5% 5.0% 3.0% 1.0% 3.4% Source: CLG and Savills, Knight Frank,

Figure 16: UK: RICS Survey: sales expectation for the next

3 months London (% balance)

Figure 17: UK: RICS Survey: House price expectations on

(SA, % Balance)

-40

-20

0

20

40

60

80

A p r - 2 0 0 0

D e c - 2 0 0 0

A u g - 2 0 0 1

A p r - 2 0 0 2

D e c - 2 0 0 2

A u g - 2 0 0 3

A p r - 2 0 0 4

D e c - 2 0 0 4

A u g - 2 0 0 5

A p r - 2 0 0 6

D e c - 2 0 0 6

A u g - 2 0 0 7

A p r - 2 0 0 8

D e c - 2 0 0 8

A u g - 2 0 0 9

A p r - 2 0 1 0

D e c - 2 0 1 0

A u g - 2 0 1 1

A p r - 2 0 1 2

D e c - 2 0 1 2

A u g - 2 0 1 3

-100

-80

-60

-40

-20

0

20

40

60

80

100

A p r - 2 0 0 0

D e c - 2 0 0 0

A u g - 2 0 0 1

A p r - 2 0 0 2

D e c - 2 0 0 2

A u g - 2 0 0 3

A p r - 2 0 0 4

D e c - 2 0 0 4

A u g - 2 0 0 5

A p r - 2 0 0 6

D e c - 2 0 0 6

A u g - 2 0 0 7

A p r - 2 0 0 8

D e c - 2 0 0 8

A u g - 2 0 0 9

A p r - 2 0 1 0

D e c - 2 0 1 0

A u g - 2 0 1 1

A p r - 2 0 1 2

D e c - 2 0 1 2

A u g - 2 0 1 3

Source: RICS Source: RICS



28 October 2013

Housebuilders



Demand to remain robust

Household increases

Household growth in London is an important determinant of demand in the

city and with the greater proportion of population of childbearing age in

London driving 38% of the country’s strong natural population growth (from

only 14% of UK population). The surplus of 2.5 births over 1 death is only

slightly offset by a usual net out-migration to other UK regions (in 5 of the past

8 years to 2011 an overall net migration loss of 82,000).

The macro-influences of demand

Employment driving volume increases

Through 2012 a quarter of all jobs in England were created in London and

going forward to 2015 the London Plan estimates a 36K increase inemployment pa. While a portion of this employment will be served by resource

from outside London, this nonetheless provides a significant driver for housing

demand.

Figure 18: Breakdown of employment in London

Agriculture,hunting, forestry

and fishing0%

Mining, quarrying,electricity gas and

water supply1%

Manufacturing8% Construction

4%

Wholesale, retail,hotels, transport,communication,

financial, realestate, renting and

business activities54%

Publicadministration,education, health,

social work etc33%

Source: ONS

Figure 19: London GDP vs London transactions Figure 20: London employment vs London transactions

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

-0.2

-0.1

0

0.1

0.2

0.3

0.4

1 9 8 7

1 9 8 9

1 9 9 1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9 9

2 0 0 1

2 0 0 3

2 0 0 5

2 0 0 7

2 0 0 9

2 0 1 1

Change in London GDP

Change in London transactions

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

1 9 8 7

1 9 8 9

1 9 9 1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9 9

2 0 0 1

2 0 0 3

2 0 0 5

2 0 0 7

2 0 0 9

2 0 1 1

% change in London transactions

% change in London employment

Source: Datastream, Deutsche Bank Source: Deutsche Bank, CML, Datastream



28 October 2013

Housebuilders



Affordability of buying in London remains better than renting

The CML reports the cost of a mortgage in London to be equivalent to approx

20% of income (based on capital and interest payments). This is only

marginally higher than the 18.7% for the UK as a whole. However this

affordability is shown as being significantly better than the affordability of

renting where the median rent for Greater London (estimated by GLA to be

£275 pw) represents 43% of weekly income for a medium income. This

affordability however has a significant skew between boroughs of London with

rental costs for a lower quartile 2 bedroom in Kensington and Chelsea costing

77% of a London medium income, and 65% of the median income from

someone from the borough.

Figure 21: Income multiple of mortgages and average

LTV for London

Figure 22: Interest payments (with and without capital) as

% of income for London mortgages

0

20

40

60

80

100

0.000.501.001.502.00

2.503.003.504.00

Q 1 7 4

Q 1 7 6

Q 1 7 8

Q 1 8 0

Q 1 8 2

Q 1 8 4

Q 1 8 6

Q 1 8 8

Q 1 9 0

Q 1 9 2

Q 1 9 4

Q 1 9 6

Q 1 9 8

Q 1 0 0

Q 1 0 2

Q 1 0 4

Q 1 0 6

Q 1 0 8

Q 1 1 0

Q 1 1 2

Income multiple median Percent advance median

0

5

1015

20

25

30

35

Q 1 7 4

Q 4 7 5

Q 3 7 7

Q 2 7 9

Q 1 8 1

Q 4 8 2

Q 3 8 4

Q 2 8 6

Q 1 8 8

Q 4 8 9

Q 3 9 1

Q 2 9 3

Q 1 9 5

Q 4 9 6

Q 3 9 8

Q 2 0 0

Q 1 0 2

Q 4 0 3

Q 3 0 5

Q 2 0 7

Q 1 0 9

Q 4 1 0

Q 3 1 2

Interest payments as % of income median

Capital & interest payments as % of income median

Source: CML Source: CML

Capital upside remains important to demand

Capital gain is reported as an incentive to domestic buyers (as it is nationally).

With estate agents in the region anticipating 4-5% house price appreciation on

average pa we believe is an important attraction for housing demand.

Figure 23: London house prices Figure 24: Average prime central London total returns

since purchase (%)

0100200300

400500600700800900

Q 4 7 3

Q 3 7 5

Q 2 7 7

Q 1 7 9

Q 4 8 0

Q 3 8 2

Q 2 8 4

Q 1 8 6

Q 4 8 7

Q 3 8 9

Q 2 9 1

Q 1 9 3

Q 4 9 4

Q 3 9 6

Q 2 9 8

Q 1 0 0

Q 4 0 1

Q 3 0 3

Q 2 0 5

Q 1 0 7

Q 4 0 8

Q 3 1 0

Q 2 1 2

Halifax Greater London Nationwide London

0

2

4

6

8

10

12

14

16

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

Source: Nationwide and Halifax Source: Knight Frank



28 October 2013

Housebuilders



Figure 25: London House price forecasts

Q2 2013 2013 2014 2015 2016 2017 Annual av to 2017

Central London (Savills) 2.5% 6.0% 3.0% -1.0% 8.0% 6.5% 4.5%

Outer Prime London (Savills) 0.8% 7.0% 3.5% -0.5% 7.0% 7.0% 4.8%

Mainstream London (Savills) Na 6.5% 6.0% 4.0% 4.5% 2.0% 4.6%

Knight Frank Prime Outer London na 1.0% 3.0% 4.0% 5.0% 5.0% 3.6%Prime Central London (Knight Frank) 7.7%* 6.0% 4.0% 6.0% 6.0% 6.0% 5.6%

UK (Savills) Na 3.5% 4.5% 5.0% 3.0% 1.0% 3.4% Source: CLG and Savills, Knight Frank,

Government initiatives and taxes

Help to Buy should aid demand from domestic market for lower priced homes

In its March 2013 Budget the UK government announced Help to Buy – its next

initiative to aid not only the new build market but also the housing market as a

whole. Within this we see the massive extension of the shared equity product

of greatest importance driving increases in selling rates in the UK and London.

We believe the shared equity element could gain significant traction in London

The new programme of shared equity launched in April 2013 has government

backing of £3.5bn over 3 years (compared to the £210m in 2012 and £280m

targeted for 2013 in the previous FirstBuy 1 and 2 programme) and within the

scheme the government will take up to a 20% equity stake in a new build

home bought (the customer raising 5% deposit and 75% LTV mortgage). While

the government has had previous shared equity products, with Help to Buy 1 it

has massively widened the customer base for these products now available to

all buyers of newbuild homes up to £600,000 cost who will use it as a main

residence, rather than the previous scheme was limited only to first time

buyers with income of less than £60,000 (given current mortgage multiples

this implied a home price cap on the previous product of £180-200K). This

product is targeted to drive a 25% upside in volumes for the UK and given the

significantly higher price cap ought to be more applicable to London than

previous initiatives. With an estimated average house price in London of £464K

(Nationwide) to £692K (Halifax) Help to Buy we believe will be more useful in

the outer boroughs of London and should provide some support to the

domestic buyer.

The Mortgage guarantee we see having less of an impact

We remain more reserved on the ultimate benefit of Help to Buy 2 – the

mortgage guarantee product. Launched in mid Oct 2013 with the guarantee

available for the banks from Jan 2014, the government will offer a guarantee

to lenders for a fee for up to 15% of any new mortgage (above 80% LTV) taken

out to buy or remortgage on a new build or second hand property up to thevalue of £600,000. In doing so the government is seeking to allow those with

limited savings (but who can afford the minimum 5% deposit) but the ability to

meet the monthly payments access to a higher LTV product. The government

is targeting to make available £12bn of guarantees to lenders which will be

sufficient to support £130 billion of high loan to value mortgages. At this stage

we have no news from the FSA as to how it sees this product being accounted

for in terms of capital treatment at the banks (ie how it will account for the

guarantee), and with the costs of the guarantee borne by the customer of the

few products launched most have interest rates of around 5% (compared to a

60% fixed rate of approx 2%). As such until that time we remain more cautious



28 October 2013

Housebuilders



of the upturn to volumes both for the housebuilders but also the general

market may see.

The impact of tax and Stamp duty changes on demand

In its 2012 Budget the government increased the stamp duty payable by a

buyer of a property to 7% for properties above £2m, with this increasing to

15% for a non-natural person (ie a holding company). This compares to the 5%

previously (which is still applicable to house between £1-£2m). Stamp duty for

properties below £2m was left unchanged. Analysis from estate agents

suggest that purchases in corporate vehicles or in shares in offshore

companies have reduced from 14% and 12.4% respectively to 10% for both

together. In the 2013 Draft Finance Bill the UK government imposed an annual

charge for properties above £2m held by “non-natural” persons – known as

the Annual Residential Property Tax. This annual charge ranges from £15,000

to £140,000 for properties valued over £20m. It also included the disposal of

such a property by a non-natural person within the CGT regime (at 28%).

Mansion tax could also impact demand for homes above £2m

Both the Liberal Democrats (part of the coalition govt) and the Labour Partyhave discussed a mansion tax in order to raise £1.7-2bn annually. Under the

Liberal Democrats proposal this would be payable on all homes over £2m

valuation, at a rate of 1% pa for the portion of the value above this level

(although a review by Savills suggested in order to raise the desired amount

the threshold would need to reduce to £1.3m). With a £2.5m home therefore

liable for a £5,000 pa cost we believe this could impact demand for homes

liable for this potential tax, although experience of the impact of stamp duty

changes suggest the impact would be less of an impact on demand for homes

in excess of £3m.

Mayor’s hopes to keep stamp duty to build supply is unlikely to be accepted

In recent months Boris Johnson has made a number of statements requestingthat London be able to keep the revenues generated from Stamp Duty in the

Capital in order to put this to work to build more homes. With nearly £1.3bn

raises in stamp duty in 2012 it has been estimated that this could fund an

additional 7,647 homes pa (based on a new build cost of £170,000). However

given that London accounts for approx one-third of all stamp duty raised we

do not see the UK Treasury favouring this suggestion.

Figure 26: Stamp duty thresholds

House price Stamp duty land tax %

£0 - £125,000 0

£125,001 - £250,000 1%

£250,001 - £500,000 3%

£500,001 - £1 million 4%

Over £1 million - £2 million 5%

Over £2 million 7%

Over £2 million bought by corporate bodies 15% Source: CLG

Strong demand from overseas buyers

Overseas buyers dominated new build demand

Through the past 2-3 years we have heard from estate agents that demand for

new build homes in London have been dominated by overseas buyers – these



28 October 2013

Housebuilders



purchases accounting for 50-80% of new build volumes, although this appears

more applicable to transactions from £1- £2m selling price and above. The

participation of overseas players is not new: through the previous peaks in the

market, London and some of the other major cities in the UK saw significant

demand from overseas reaching above 70% in 2007. However there has been

a shift in the origin of the participants: through the last peak coming from

Ireland, South Africa, Europe and Asia but since the downturn dominated by

Asia and focused almost exclusively on Prime Central London, supplemented

in more recent years by the Russians and Europeans. At this time we believe

the level of overseas buyers of new build properties in 2012 have returned

back to previous highs. However Savills highlight that it sees the proportion of

total re-sales to overseas customers is in line with the nature of London

residents themselves which are over 35% made up of residents born overseas

(increasing to over 50% in some boroughs).

Figure 27: New build sales in prime London by purchaser Figure 28: Motivation of overseas

buyers of London new build properties

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

less tha £450sft

£450-700 sft £700-£1,000sft

£1,000-£1,500sft

£1,500 -£2,000 sft

£2,000 sft +

UK Eastern Europe and CIS

China and Pacific Asia Western Europe and Nordic countries

Middle East and North Africa South Asian subcontinent

Investment(rental)

65%

Childrenthen

investment(or viceversa)33%

Second

home2%

Source: Knight Frank Source: Knight Frank

Figure 29: Investor vs owner occupier Central London

new build

Figure 30: % resales in London to overseas buyers

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

2006 2007 2008 2009 2010 (toMay)

Owner occupier Investor

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010 2011 2012

Overseas buyers UK

Source: Deutsche Bank Source: SAvills



28 October 2013

Housebuilders



Figure 31: Central London new build property buyers

nationality

Figure 32: Breakdown of buyers of new build in Central

London >£2m by nationality 2011

UK27%

Hong Kong16%

Singapore23%

Malaysia4%

Russia3%

China5%

Turkey3%

Nigeria2%

India2% Saudi

Arabia1%

UAE1%

Ukraine1%

Other12%

Russian8%

UAE3%

US3% China

3%

Eurozone9%

India3%

Hong Kong2%

Switzerland1%

Burma1%

Other 67%

Source: Knight Frank Source: Knight Frank

Figure 33: Factors influencing wealthy peoples’ decision to buy property in

London 2011

-80

-60

-40

-20

0

20

40

60

80

100

120

E s t a b l i s h e d

n e t w o r k o f

c o n t a c t s a

l r e a d y i n

L o n d

o n

G e o - p o l i t i c

a l / s e c u r i t y

c o n c e r n s i n o t h e r

c o u n

t r i e s

T h e w

e a k p o u n d

E c o n o m i c p e r f / G D P

g r o

w t h

M o r t g a

g e f i n a n c e

a v a

i l a b i l i t y

I n f l a t i o n

D e b t - b u s i n e s s a n d

c o n s

u m e r

D e b t -

s o v e r e i g n

G o v ' t h o u s

i n g m a r k e t

i n t e r v e n t i o n

U K c h

a n g i n g t a x

e n i r o n m e n t

Source: Knight Frank

Weakness of sterling has made London look attractive to overseas buyers

Taking into account the weakness of the UK pound over the past 5 years,

house prices in London while at 88% of peak to sterling investors, remain

significantly cheaper to overseas buyers. For those from China and Singapore

London house prices remain less than 60% of peak, for Malaysian, Hong Kong

and US$ investor’s less than 70%. This also compares to house prices in some

of the investors home territories which shown massive increases, eg through

2010 house prices in Hong Kong increased by 50% impacting affordability andthe ability of secure attractive income returns on properties. In some Asian

countries in a bid to stem house prices tax regimes have been put in place.

This has also pushed investors towards the UK.



28 October 2013

Housebuilders



Figure 34: London house prices in alternative currencies Figure 35: House prices in Hong Kong, China, New York,

vs London

0.6

0.8

1.0

1.2

1.4

1.6

Q 3 0 5

Q 1 0 6

Q 3 0 6

Q 1 0 7

Q 3 0 7

Q 1 0 8

Q 3 0 8

Q 1 0 9

Q 3 0 9

Q 1 1 0

Q 3 1 0

Q 1 1 1

Q 3 1 1

Q 1 1 2

Q 3 1 2

Q 1 1 3

GBP EURChina HK $Singapore $ Malaysian Ringgit

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Q 2 0 2

Q 4 0 2

Q 2 0 3

Q 4 0 3

Q 2 0 4

Q 4 0 4

Q 2 0 5

Q 4 0 5

Q 2 0 6

Q 4 0 6

Q 2 0 7

Q 4 0 7

Q 2 0 8

Q 4 0 8

Q 2 0 9

Q 4 0 9

Q 2 1 0

Q 4 1 0

Q 2 1 1

Q 4 1 1

Q 2 1 2

Q 4 1 2

Q 2 1 3

London New York Hong Kong China

Source: Datstream Source: Datastream

London is one of the few truly multicultural cities in the world.

London it one of the few truly multicultural cities in the world and as such life-

style is often quoted as a key reason to buy property in the capital (and the

Olympics proved a good advert for this). Familiarity with London, business and

family connections are also cited as important for many Asian investors but

particularly those in Hong Kong. Physical security is often stated as a benefit of

London, and Asian investors have a strong focus on being close to transport

systems preferring investments close to the underground network and

generally zone 1 or 2 (high quality security, secure car parking and full time

concierges are apparently in increasing demand). For those doing business in

London it remains one of the more costly cities in the world albeit that costs

have shown a more restrained progression over the past year than competitor

cities.

Figure 36: Total real estate occupancy costs at Dec 2012 Figure 37: Total cost change since 2008

0

200000

400000

600000

800000

1000000

1200000

H o n g K o

n g

L o n d

o n

N e w Y o r k

P a

r i s

T o k

y o

S i n g a p o r e

S y d n

e y

M o s c o w

S h a n g h a i

M u m b a i

-30%

-20%

-10%

0%

10%

20%

30%

H

o n g K o n g

L o n d o n

N e w

Y o r k

P a r i s

T o k y o

S i n g a p o r e

S y d n e y

M o s c o w

S h a n g h a i

M u m b a i

Financial Creative

Source: Savills, based on one financial and one creative company Source: SAvills

Education remains a strong draw for London.

Education appears to be one of the most important factors pulling international

purchasers to London. Over the past decade the number of Asian students

studying at UK universities have increased by 175% with the strongest growth

from Chinese, India and Pakistani nationals. In many cases Asian investors

look to cover the period of their children’s stay at university in properties they

then keep for investments (Figure 28).



28 October 2013

Housebuilders



Seeking safe haven for their money.

London has one of the clearest property laws globally, and importantly a stable

political system. This financial and legal security is often quoted as a key

determinant of buying in London and often the London market sees a pick-up

in demand when the geopolitical environment deteriorates elsewhere (buyers

from Burma in the 12 months after the military junta was dissolved accounted

for 1% of transactions >£2m). Potential capital gain is also an incentive for

financial investment with estate agents anticipating 4-5% house price

appreciation on average pa in the region we believe is an attraction. The rise in

house prices in China has created confidence in “bricks and mortar”

investments. This combined with a ban on third home ownership and

difficulties in finding low risk investment vehicles in China has also increased

interest in London. Importantly if you are not domiciled in the UK you may

qualify for remittance (an exemption) on capital tax and there is no control of

the movement of money across borders. Rental yields, which we view of

secondary importance to capital gains are none-the-less important (especially

for the Singapore and Hong Kong investors). However the flattening off in

rental yields in Prime London in 2013 (-1.2%) may have had some impact on

demand although London residential yields still look well placed relative toother of the global cities (Figure 41).

Figure 38: London House rental value movements

2013 2014 2015 2016 2017 5ys to 2017

Prime central London (Knight Frank) 3.0% 5.5% 4.5% 4.5% 4.5% 24.0% Source: CLG and Savills, Kinght Frank, * YOY, 2.9% on Q4 12

Figure 39: Risks to London as a future wealth hub

-100-80-60-40-20

0

20406080

N o n d o m t a x c h a n g e s

O n e o f f w e a l t h t a x e s

H i g h e r r a t e s o f g e n e r a l

t a x a t i o n

L o s s o f n i c h e f i n a n c i a l

s e r v i c e s e c t o r a c t i v i t y

t o S w i t z e r l a n d

L o s s o f b r o a d e r

f i n a n c i a l s e r v i c e s e c t o r

a c t i v i t y t o A s i a

S e c u r i t y t h r e a t s

Not a significant issue A concern for the future

A real concern now A real and significant concern now




28 October 2013

Housebuilders



Figure 40: Residential capital growth 2012 Figure 41: Residential yields 2012

-5%

0%

5%

10%

15%

20%

H o n g K o n g

N e w

Y o r k

M o s c o w

S y d n e y

S i n g a p o r e

L o n d o n

M u m b a i

S h a n g h a i

T o k y o

P a r i s

0%

1%

2%

3%

4%5%

6%

7%

N e w

Y o r k

M o s c o w

L o n d o n

S y d n e y

P a r i s

T o k y o

S i n g a p o r e

M u m b a i

H o n g K o n g

S h a n g h a i

Source: Savills Source: Savills



28 October 2013

Housebuilders



Supply shortage tocontinue

The London Plan targets 34,000 new homes pa.

Through the 1990s new housing supply in London averaged 19,000 units a

year. While this rose to 28,000 in 2007/8, it declined again to 20,040 homes in

2011/12, creating an average of 20,458 homes pa have been built in the past 5

years to 2012. Supply models from estate agents suggest housebuild in the

capital could increase to 24,000 units completed each year over the coming 10

years, implying London could see a supply gap of 115K homes (relative to the

CLG household growth estimates) by 2023. Within Central London the

estimated short fall is anticipated to be even greater with the number of new

private homes being built at a lower level than seen in the previous decade,

and could leave over 50% of potential household growth unmet by new home

supply.

Figure 42: London completions

0

5000

10000

15000

20000

25000

30000

35000

2 0 0 5 / 6

2 0 0 6 / 7

2 0 0 7 / 8

2 0 0 8 / 9

2 0 0 9 / 1 0

2 0 1 0 / 1 1

2 0 1 1 / 1 2

2 0 1 2 E

2 0 1 3 E

2 0 1 4 E

2 0 1 5 E

2 0 1 6 E

2 0 1 7 E

Net market completions Net affordable completions

Current London Plan

Source: Savills

Planning permissions and restraining supply

Planning in London is governed by the Mayor.

Within London planning is overseen by the Mayor and while there are no

targets for housing growth in the rest of the UK, London has continued to

issue targets. The London Plan (the development strategy document of the

Mayor and the Greater London Authority) targets the building of 33,380 homes

per year in London in order to fulfill demand (short of both the <38K estimate

of Savills and the 36K suggested by CLG). Social requirement is also dictated

by the Mayor, and within the London Plan it strives for 13,200 new affordable

homes pa (rather than its previous requirement for 50% affordable). To Feb

2013 56,000 affordable homes have been built since 2008, with 31,000 more

in the pipeline to 2015.

But planning remains an impediment to development

Through 2012 there was a strong uplift in planning in London with the number

of residential units granted permission up 63% compared to 2011. Despite this,

however, permissions were still 22% lower than the total number of units

granted permission in 2008. The planning process is viewed by the Boris

Johnson, Mayor of London, as being an impediment to supply, and in a speech



28 October 2013

Housebuilders



in Nov 2012, the Mayor of London, reported that 170,000 homes in London

were “stuck” in planning approval. This issue has also been raised by Berkeley

who previously gave an example of one site with over 400 pre-commencement

conditions on one of its developments. While on a UK basis the adoption of the

National Policy Planning Framework (NPPF) has appeared to create a more

positive environment for planning applications, the biggest beneficiary of this

appears to be on greenfield land of which London has few.

Density is not seen as the answer to drive increased supply

Under the previous Mayor, Ken Livingstone, one of the ways of trying to

increase the build of new homes was to push for higher density of homes with

planning. Through this time many of the developers renegotiated their

planning to increase the number of units on sites. Under the current London

Plan, this has proved more difficult with the focus of the London Housing

Design Guide suggesting minimum size requirements on affordable homes in

London as a preference over density.

Build to rent could drive significant increase in supply

The increasing use of “Build to rent” could change the face of planning in

London. In its 2013 Spring Budget the Government unveiled plans to increase

the size of its Build to Rent scheme five-fold, taking the total amount allocated

to £1bn after the scheme was significantly over-subscribed. The fund provides

equity or loan finance to support the development finance stage of building

new homes for private rent. Within this scheme 45 schemes of which a

number are in London with the total of these schemes adding to 8,000-10,000

units. However we also believe there may be discussions where “build to rent”

may be an acceptable alternative to social housing. The Montague report

which was published in August 2012, suggested that new homes built

specifically for the rental sector should come with a fixed period of years in

which they remained rental properties and respondents felt this period should

be between 10 and 20 years. This it was viewed would be especially helpful inaiding the undersupply of housing in London.

Office to residential conversions are not always ideal

On May 30, 2013, the Government amended the Planning Order to make it

possible to convert Class B1 office buildings to Class C3 residential dwellings

without having to apply for planning permission for a 3 year period (to end

May 2016). While a number of London Boroughs obtained exemption (see

right) this change could be significant with original estimates that conversion

of empty office space in London could allow approx 250,000 new homes to be

built. However this change of planning rights (from office to residential) only

extends to the change of use of the building and to internal alterations and fit

out; any external building work associated with the conversion (such as workto create or alter an existing entrance or to install balconies) will require

planning permission. Without changing the outside façade many offices may

not be desirable for residential. Also there are potentially significant technical

challenges in office-to-residential conversions which may imply increased

costs. Examples of this include deep floor plates and solid concrete frames

which may require extensive modification to allow sufficient daylight and

ventilation, as well as more extensive drainage and service runs; offices with

large windows and curtain walling may fall well below thermal requirements

under Part L1B, as well as compromising tenants’ need for privacy, perhaps

making a complete reclad the only option; issue with sound transmission, fire

protection and provision of outside space may also be issues. Finally even

Internal floor space minimum size

requirements

Two storey dwelling Essential gross internalfloor area

2 bed 4 person 83

3 bed, 4 person 87

4 bed 5 person 100

4 bed, 6 person 107 Source: DCLG

Boroughs with exemption from the

change in planning on office to

residential

City of London Westminster City Council

Islington Kensington and Chelsea

Hackney Camden

Tower Hamlets Newham (Royal Docks)

Southwark Wandsworth

Lambeth Source: DCLG



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Housebuilders



without planning permission vehicle access and other issues will still need to

be addressed with the local borough. In 2013 it is estimated that approx 1,350

of completed units will be office to residential completions.

Planning remains geographically skewed

Due to the nature of land availability and also the individual borough and

council leaders’ willingness to grant planning, we believe a significant portion

of this supply is due to be delivered from a smaller number of big sites.

Industry reports suggest there are approx 4,000 schemes in pre-planning or in

the planning pipeline with the potential to provide 630K homes. However of

these schemes 1000+ units account for 35%+ of this pipeline. Examples of the

strong skew in planning can be seen at Nine Elms in Vauxhall which approx

16,000 new homes are expected in the coming 10 years (Figure 45).

Figure 43: Key large projects in London with planning

Project Company Number of units Status Est first completion dates

Kings Cross King's Cross Central Ltd Partnership(DHL/LCR/Argent)

1900 Under construction

Earls Court 2 Capital and County 6000 Application or appeal 2015

Greenwich Penninsula Quintain and Knight Dragon jv 3100 Permission - full 2014

Battersea power station S P Setia 3444 Permission - full 2014

New Covent Garden Estate CGMA + VSM Estates 2443 Permission - full 2014

Embassy Gardens Ballymore 1982 Permission - full 2013

Nine Elms Parkside Royal Mail Group PLC 1870 Permission - full

Westfield White City Westfield shopping Towns Ltd 1524 Permission - full 2014

Royal Mail Mount Pleasant Royal Mail Group PLC 1000 Pre planning 2014

BBC television Centre Stanhope PLC 1908 Pre planning 2015

Waterloo station Network Rail Infrastructure Ltd 6816 Pre planning 2015

Guys Hospital The Trustees of The Guy's and St Thomas' Charity 1572 Pre planning 2015

London Bridge Underground Transport for London 2958 Pre planning 2015

Euston Station Network Rail Infrastructure Ltd 2000 Pre planning 2015

London Docks (Wapping) Berkeley Group Holdings 1300 Planning 2016

Total of 14 large projects 39817 Source: Company data, Knight Frank, Deutsche Bank

Figure 44: Breakdown of private supply in London

Source: Financial Times and Knight Frank



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Housebuilders



Figure 45: An example of the focus of supply – Nine Elms

Developer of Units Status

The Tower at St Georges Wharf Berkeley 223 Outer shell complete

Riverlight Berkeley 806 Construction started

Vauxhall Cross Wendover Investments 291 Construction started

Embassy Gardens Bal lymore 2000 Construction startedMarco Polo House. Marco Polo group 456 Plans approved

Battersea Power Station SP Setia 3800 Plans approved

Sky Gardens Oval Partnership 239 Plans approved

Hampton House Berkeley 242 Plans approved

Eastbury House Berkeley 48 Plans approved

Parliament House, 81, Black Prince Road Ristoia 101 Plans approved

Nine Elms Parkside Royal Mail group 1870 Plans approved

Sainsbury's Barratt and L&Q 645 Plans approved

One Nine Elms Green Property LTD/CIT 491 Plans approved

The Garden at New Covent Garden Market Covent Garden Market Authority/VINCI and St Modwen (VSM) 1600 Application submitted

The Heart of Nine Elms Christies 493

Spring Mews CLS 399 student Plans approvedVauxhall Square CLS 520 Plans approved

Vauxhall Island Kylan

30-60 South Lambeth Road Pre development

Battersea Gardens National Grid 800 Pre development

Sleaford Crest Sleaford Street management/ Dairy Crest 300 Pre planning

Patcham Terrace Pre development

Bondway Pre development

Keybridge House Pre development

London Fire Brigade HQ Native Land 363 Planning submitted

Texaco Garage Albert Embankment

Total 15380 Source: Deutsche Bank and company data

There remain a number of areas which are anticipated to see very low new

build completions – these include much of the Prime London boroughs

(Kensington and Chelsea, Belgravia, Camden, Mayfair, Knightsbridge and the

City). Within the supply due on stream in the coming period, it is reported

there has been a flight to prime. While a number of the most significant

planning permissions relative to demand appear in some of the lesser priced

areas in many cases what are being built on the developments are in a higher

price range. Redrow highlights concerns about the number of developments

targeted customers spending £800K-£1.5bn.

Development finance remains restrictiveDevelopment finance for London remains easier than elsewhere in UK.

With strong margins, faster selling rates and the ability to sell off-plan we

believe there is a more efficient capital allocation market in London than seen

in the UK as a whole, and in the past years the market has seen a larger

number of competitors for land ranging from the listed volume housebuilders,

private equity, private individuals and regionally focused developers. Over the

past 12 months we hear of a number of private investors who talk of being

priced out of the market for smaller, more straightforward sites and the larger

players talk of house price inflation being factored into land viability

calculations.



28 October 2013

Housebuilders



However more complex land is still seeing more limited competition

Development finance however still seems relatively restricted for larger sites.

Issues such as vacant possession, long build timescales and complex planning

– anything which delays the speed of development – appear to be issues for

development finance. Issues with working capital requirements (particularly

where a tall tower may be involved with £40-60m of WIP required) also appear

to impact the availability of finance. While there may be a number of sovereign

funds and private individuals who appear willing to partner funding, there are

instances in the market of the financing failing to materialise (and a number of

bids have been lost when they involve such partners as vendors seek to prefer

more simple purchaser structures).

Availability of land and supply from government sources

Over the past 12 months the land market in London has been relatively active

and in the 12 months to Oct 2012 Savills reported over 220 residential

transactions in London (71% in Zone 1-2, with 21.4% in Westminster, Camden

8.5%, Southwark 7.6% Wandsworth 7.1% and Lambeth 6.8%). This we believe

is ahead of historical levels, with Barratt reporting an 80% increase intransactions YoY in 2013. This report states that in 2012 in London the

majority of land deals appear in the £2-10m with 8 deals done >£50m, and

approx 22 at £15-50m.

Figure 46: Examples of sources of land

Embassies and industry moving from prime to less central London locations (eg the US and Dutchmoving to Nine Elms)

Office conversions to residential which will occur as well as other brownfield sites available.

Adaption of land owned by commercial businesses– eg supermarkets, buildingdistributors.

Land owned by banks, or being disposed of by administrators

Land previously containing other industries – such as newspaper plant, post offices, auction housesetc.

Land previously containing other real estate businesses Source: Deutsche Bank

Over the past 12 months the developers report a suitable supply of land.

However there appears to be significant variation in the location of sites, the

level of planning, and the type and complexity of build it requires

Sites of large scale sites tend to see a limited number of purchasers –

Berkeley, Barratt and to a lesser extent Bellway, a couple of larger

housing associations, real estate companies and private individuals.

Sites with complex builds including towers tend also to see only a

limited number of potential purchasers, with Berkeley and Barratt

leading the way. Office conversions tend to attract a wide audience. Through the

coming years we see a significant number of these, with the

complexity of build and the planning offering fewer barriers to entry.

With many of these office conversions not planning to change the

outside aesthetics of the building we believe this outside ascetics need

to be considered when pricing the units.

Small sites with limited infrastructure tend to see significant interest

from a range of list and private housebuilders, private equity and

private investors.



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Housebuilders



Government released land remains important

From 10 May 2013 the GLA formed the London Development Panel (LDP). This

is a shortlist of 25 developers to whom public land owners, including London

boroughs and government bodies can contract the sale of land in a bid to

accelerate the delivery of housing in London. Through its 4 year tenure the

GLA expects over £5 billion of development to be delivered though the LDP

and in addition the list will be available to other public sector landowners such

as local authorities, housing associations and government departments.

Westminster also has a similar panel (which differs from the LDP) of 8

developers that it will look to carry out works for its housing regeneration

programme over the coming 4 years. These panel members will get to

compete for projects in Westminster’s four renewal areas of Tollgate Gardens,

Church Street, Westbourne Green and Ebury Bridge (with an estimated value

of more than £400m.) The agreement has also included an option for Tri-

Borough partners Hammersmith & Fulham and Kensington and Chelsea to also

use the panel, which if taken, could see the total value of all works rise to as

much as £900m.

Figure 47: London Development Panel membersAffinity Sutton Homes Ltd Countryside Properties (UK) Limited London & Quadrant Housing Trust Taylor Wimpey UK Ltd

Ardmore First Base Partnership Ltd Family Mosaic & Mulalley Lovell Partnerships The Berkeley Group PLC

Barratt (BDW Trading Ltd) Galliford Try PLC Notting Hill Housing Telford Home Plc

Bellway Homes Limited Hadley Mace Holdings Ltd Places for People Homes Limited Wates Construction Ltd

Bouygues Leadbitter Consortium Higgins Group PLC Redrow Homes Ltd

Carillion-igloo and Genesis Kier Limited Regenter Limited

Catalyst Housing Limited Lend Lease Europe Holdings Limited Rydon Construction Limited Source: GLA

Figure 48: Westminster Development Framework Panel

Affinity Sutton Homes Ltd Berkeley Homes Bouygues Development/ Londonewcastle Grosvenor

HadleyMace Higgins Redrow Wilmott Dixon Source: Westminster City Council

Reputation for build is important for securing land from other sources

Within the volume housebuilders many have sought to develop relationships

with land owners in a bid to become the preferred developer for sites. While

for some of the business relationships we believe the finance considerations (ie

the land price) remain the most important aspect, however for the housing

associations, local authorities, borough leaders and government other aspects

have increased priority. Issues such as past history of building out land in a

timely and responsible manner, expertise with local communities can be just

as important in a bidding process for land.

Social/affordable housing

An Affordable home must be affordable to income range of <£61.4K

Within the London Plan the Mayor seeks to ensure an average of 13,200

affordable homes per year and of these it proposes that 60% of all affordable

housing should comprise social rented homes and 40% should be intermediate

homes. Intermediate social housing can be a range of products including low

cost home ownership programmes such as shared ownership and shared

equity. It can also include intermediate rent and rent to buy products. For a

new home to be counted as intermediate they must be affordable to

households in the income range £18,100-£61,400 with the aim that the

average of all new intermediate housing should be at the mid-point of this



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Housebuilders



range. Family homes with 3-4 bedrooms are allowed a further 20% on the

upper range to £74,000.

Approximately one-third of homes built are affordable

Within London it is estimated that approx one-third of homes built are

affordable, with approx 44% of these built by the affordable sector (Housing

associations and local authorities), increasing up to 71% when including those

built by the other builders/developers. The remainder are built by local

boroughs and government. Within the homes constructed we are aware that

registered social landlords are at times contracting to buy units above those

stipulated in Section 106 at full market price. These we believe are being

registered as private homes, but then registered as affordable which could

create confusion in some of the market numbers.

The Mayor continues to look at ways to finance affordable housing

In recent months Boris Johnson has made a number of statements requesting

that London be able to keep the revenues generated from Stamp Duty in the

Capital in order to put this to work to build more (social) homes. With nearly

£1.3bn raises in stamp duty in 2012 it has been estimated that this could fund

an additional 7,647 homes pa (based on a new build cost of £170,000).

However given that London accounts for approx one-third of all stamp duty

raised we do not see the UK Treasury favouring this suggestion.

Significant build plans for social announced

Over the past months we have seen announcements out of some of the

boroughs citing significant plans for council house builds in the coming year,

for example Southwark announced to build 10,000 council homes in the

coming 30 years. However in many cases the funding of these new homes is

dependent on the proceeds captured by the authorities in the region, and with

issues such as rent convergence being abandoned in FY14/15 (bringing

affordable rents up to target levels) then this implies that some plans for build

may be scaled back (as subsequently warned of by Southwark Council).



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Housebuilders



2) Profitability of Londonhousebuilding



28 October 2013

Housebuilders



London a significantcontributor to profits

We believe EBIT margins of up to 30% are being made in London

We believe that when purchasing land developers in London are looking for a

gross margin of 20-30% and reflecting the strong house price inflation through

the time we believe that many of the other developers are achieving the top

end of this level. With many of these operating pure development models (with

limited number of direct employees) in which admin costs are low, EBIT

margins of 25-28% we believe are being achieved in some developments. For

those operating more full operations we believe EBIT is nearer 20-25%.

New entrants into London driving its importance to the sector

Within the UK a number of the listed developers have had long standing

businesses in the capital city. Berkeley, Barratt and Bellway have all hadoperations in the capital on some scale through the past cycle. However since

the downturn a number of the listed developers have sought to build up

positions, either returning to London as in the case of Redrow or graduating

coverage from outer London towards the centre such as Taylor Wimpey and

Crest Nicholson. Given the time taken between land acquisitions and actual

completions many of these “new entrants” are forecast to show significant

growth in their London operations through 2014 and 2015).

Exposure of volume housebuilders to London underestimated

For Berkeley group we believe the London exposure is well understood (at

approx 70% of completions, 80% of revenue and 90% of EBIT). However we

believe the market is currently under-estimating the significant contributions torevenues and EBIT from London to the UK volume housebuilders >20% of

Barratt, Bellway and Redrow by 2015. For those companies operating with full

development models (ie undertaking build, planning, sales etc) then we view

EBIT margins ought to be largely sustainable (with upside for Barratt reflecting

the trading out of a few assets bought prior to the downturn). However we are

more cautious on those pursuing the more pure development model. For these

there are questions of sustainability of volumes (ie the purchase of land), and

profitability (given the increasing competition from land) and we view that

while these companies are looking to expand their exposure to London that in

fact the region will become less of an influence in later years.

Figure 49: London completions, revenues and EBIT as % sales2013E 2015E

Completions Revenue Est EBIT Est EBIT margin Completions Revenue Est EBIT Est EBIT margin

Barratt 12% 14% **27% **,*14.8% 13% 19% **29% **,*17.8%

Bellway 15% 19% 25% 18.0% 18% 20% 23% 20.0%

Berkeley 70% 80% 89% 22.7% 70% 83% 88% 23.5%

Crest Nicholson *** 6.2% 16% 13% 15.0% na na na na

Redrow 0.4% 0.8% 1.8% 20% 6% 15% 18% 20.0%

Taylor Wimpey 1.4% 3.7% 6.8% 25.0% 3% 9% 14% 20.0%

Average 19.8% 22.4% 27.1% 20.1% 22.1% 31.4% 35.0% 20.4%

Volume housebuilders av 7.2% 10.9% 14.7% 19.5% 10.2% 18.5% 21.8% 19.6%

Source: Company data and Deutsche Bank, *reflecting the contribution of older lower margin land in the portfolio, ** inc jv*** based on reuters consensus

Concentration of new build in

London 2013

Number ofcompletion

s

% of Londoncompletions

Barratt 1650 8.00%

Bellway 950 4.60%

Berkeley 3000 14.60%

Crest Nicholson 154 0.70%

Redrow 13 0.40%

Taylor Wimpey* 160 1.40%

Total 5927 29.70% Source: Company data and Deutsche Bank, * Central London only

nk



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Housebuilders



Drivers of profitability

Build costs

Build cost varies significantly depending on type of build

Within a P&L the build costs are usually the largest element of cost, however

the scale can differ whether the site being developed is a similar composition

to those outside London, a renovation project or a large, complex tower.

Building a tower we believe costs 20-50% more than a low rise equivalent

(build costs can increase by as much as 43% per square foot between the 10th

and the 50th floor of a tower, with the external cost accounting for as much as

25% of the total build cost). It is approx 30 floors above which there is a cost

“step point” where issues such as water supply, heating, intermediate plant

floors, sprinkler systems and super fast lifts become issues. (It should also be

noted that the net to gross ratio m2 of a tower is lower than a low rise

development due to the percentage of space taken up by the cores and theservice provisions to each floor).

Figure 50: Example build cost

Build type Cost per square foot

Bellway – Chelsea Reach High spec, refurbishment £210

Bellway – New Festival Quarter Large scale, mid height, medium spec £200 Source: Bellway

Figure 51: Build cost index for towers

80

90

100

110

120

130

140

150

50 40 30 20 10

C o s t i n d e x

1 0 s t o r e y s = 1 0 0

Number of storeys

Source: EC Harris

Significant infrastructure and work-in-progress costs involved

Development in London can vary from a small number of units to a

development of over 3000 units and as such the infrastructure requirements

and the work in progress involved can also see significant variation. Forcomplex builds which include a tower we believe the WIP on sites on a project

can be as high as £40-60m. As with elsewhere in the country Section 106

requirements (obligations from the planning) can further supplement

infrastructure costs. In some cases this can be provision for the surrounding

streets (contribute to environment improvements, building a school, creation of

a provision for cyclists) but on the larger developments this tends to involve

significant provision for transportation, schools etc (eg those developing at

Nine Elms will need to fund £350m extension of the Northern Line). This can

further significantly add to infrastructure costs on site. These social costs can

vary significantly in scope (eg Berkeley Ebury Square costing £2.2m, but its

One Tower Bridge costing £21.5m).



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Housebuilders



Ease of access and egress can significantly impact costs

Within London particularly in prime central London, at times developing a site

can involve much complexity in terms of access of materials in and waste out

of site. In many cases this may involve restricted use of machinery and

transportation through a day and also restricted storage of materials. This can

add significantly to build costs of a site.

Main contract vs sub-contract

Depending on the developer’s strategy, build of a London site is likely to be

main contracted (ie an contract signed where a contractor takes full

responsibility for the construction and usually although not always in charge of

raw material sourcing) or sub-contracted (where the housebuilder project

manages the build, contracting in each of the different services and controlling

raw materials)

The main contracting model tends to be undertaken by those

developers who do not have (or do not want to invest into) the

appropriate project management skills, or those who want to de-risk

the build of a project (taking a fixed price contract).

Sub-contracting requires project managers to be employed by the

developer and while the risk of build cost is borne by the developer it

can bring advantages in terms of capturing build cost savings (such as

the sale of thousands of tonnes of good quality ballast that digging out

may provide), but more importantly controlling the specification of

build (the main contractor would take any savings from value

engineering – perhaps putting in a slow lift etc), the ability to change

specification for customers (doing this on a main contractor contract

would incur significant penalties) or also controlling the speed of build

(this gaining importance during more difficult times when a slower

build may be preferred). However in this model the responsibility for

costs sits with the developer, potentially having both upwards anddownwards implications for margin.

Main contract may start to see cost pressure

Within London a number of the real estate companies participating in the

residential market report a tightening of the contractor market for more

complex builds (a limited number of contractors). As such anecdotal news flow

suggests that the costs of changes to build are now being charged more

readily that previously the case since the downturn.

Land costs

Land costs can equate to approx 15-20% of revenue on a new development

Land costs we believe constitute approximately 15-20% of the GDV of a

development. However these land costs as a % of costs tend to vary

significantly depending on the location, level of planning consent and ease of

build. Given the lumpy nature of land sales in terms of timing and scale there is

no time series of land prices but anecdotal evidence puts it close to peak levels

again.

For land where planning permission is already in place and a build is

relatively straightforward we understand the bidding can be significant.

In many cases on the small sites, those buying the land are still

making a strong margin although often benefiting from higher selling



28 October 2013

Housebuilders



prices than previously targeted, eg Fetter Lane which was bought by

Taylor Wimpey for £31m which is achieving 30% EBIT margin after

selling at 10% higher than estimated in its viability studies.

Land costs bidding however appears more reserved for the larger

more complex sites and it is here where we believe those with

expertise and experience can grind out strong returns over themedium term even without significant house price inflation. Berkeley

repeatedly reports that it is looking for messy sites, where they may

not yet be planning, where build is complex, where there may be

issues with neighbouring buildings or land, which may not have

vacant possession which may be too difficult, too big or too time

consuming for competitors.

Larger land deals for those with significant resource in place

We believe in order to be able to build out on the larger (and possibly more

complex) land it involves substantial resource. For larger sites quite often a

sub-contractor model is almost essential in order to allow the necessary

flexibility on timing and specification in a market which will change over time.

The model where the developer is the project manager also allows scope forthe developer to take any gains from planning which can be made.

Admin costs

Admin costs can range from <1% to 9% of sales

Depending on the resource put behind the development and the extent of

resource attributed admin costs can vary substantially from less than 1% of

sales up to approx 8-9%. For those pursuing a development model including

main contracting, outsource of planning and design consultants (costs which

are all included as part of the cost of sales and so in gross margin) the admin

structures are relatively small (Redrow 25 people in London, Crest Nicholson:

24 people, Taylor Wimpey 23 people) and as a result of this (and the higherselling price) then admin costs to sales are very low.

For those who are running sub-contractor models including project managers

they tend to have a greater resource in the email and therefore higher admin

expenses (Berkeley employs 1000 staff, Barratt 450 employees). However this

difference we believe ought to be largely an accounting issue, with these

companies seeing less cost in gross margin (and in many cases saving

themselves the contracting margin).

Affordable homes and social costs on profitability

Section 106 affordable housing requirements impact profitability

Section 106 of planning permissions dictates the level of affordable housing.

The revenue from affordable housing homes differs according to each

individual agreement with each registered provider (previously registered

social landlord). Some pricing will be worked on price per unit, some on build

cost per foot, and some as a percentage of build. In all cases the revenues will

depend on the tenure of what is being sold – ie whether affordable rent,

intermediate ownership etc. We believe that social certainly makes a lower

return than private development, but in many cases we understand that social

is sold for less than build costs (even excluding a consideration for land costs,

for example we believe that affordable housing in prime London can be sold



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Housebuilders



for £200 square foot, when build costs can prove significantly higher than

this).

But some trade off between affordable housing and cash payments

Section 106 we believe should be taken as a whole and within the planning

discussions there will be negotiations about the balance between cash

payments and the level of affordable housing. In some cases while the benefit

to the council may not change by swapping cash payments instead of

affordable housing, the additional space this can open up for private

development can increase the margin for the developer (particularly strongly

the higher the private price per square foot).

Optimisation of planning

Planning gains on larger sites can significantly increase profitability

Within any site of size, where units are sold over a long period the likelihood is

that as the developer learns from its experience on site, that it may look to

adapt later phases to increase or decrease the size of units, changing public

space etc. However through development as the community in which the site

evolves the developer may also try to alter other aspects of the planning,

including the provision for hotels, cinemas, community areas. Such conversion

of space to residential can create significant upside to site profitability. Over

recent years (and going forward) Berkeley looks to optimize its land bank by

approx 5%, using planning changes among others, however there is evidence

that it has been more successful than this on individual sites (eg Chelsea

Bridge Wharf were the original Berkeley planning permission in 1999 looked

for 449 residential units and by the conversion of commercial, office, cinema

and some parking to residential increased the final number of residential units

by 2009 to 1069 units – a massive 138% increase from the original number).

Overseas buyers equivalent profitability to domestic buyers

Most of the developers report that when selling overseas most take a

development early and as such prices on units tend not to reflect inflation that

may be available from domestic purchasers who purchase nearer the

completion of the units (although the counter to this is from Bellway that

reports any of its excursions overseas must pay for itself by achieving a higher

price than obtainable from its customer base locally). However selling overseas

can be beneficial in terms of securing larger deposits (which can in many

cases be as much as 20% in a 1 month period, compared to 10% on legal

exchange for local buyers).

In general developer’s willingness to de-risk a project through forward sellingcan differ significantly. Those who take on the build risk in many cases may

look to de-risk the project more through forward sales (Berkeley look to

forward sell/base-load each of their projects before they commence build)

while those who have derisked a build may feel more willing to wait to try to

capture any inflationary upside on its sales. However for those operating a

pure developer model management indicates that it would look to sell a third

to a half of a development pre show-home (up to a year ahead),



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Housebuilders



3) Company section



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This page has deliberately been left blank



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Housebuilders



Reuters Bloomberg

BKGH.L BKG LN

Berkeley is the largest housing developer in London

Our detailed analysis of Berkeley's London developments continues to provide

us with comfort in our forecasts for FY 15 which remain 7% above consensus.

With strong earnings upgrade momentum, management exuding confidenceand scope for share buybacks to supplement the cash return story we see

strong support in the Berkeley share price. Reflecting our earnings upgrades

as we include the benefit of 3% house price inflation from 2016 we have

upgraded our price target to 2358p. HOLD.

Berkeley is the largest housing developer in London

Berkeley has a long history operating in London and we calculate that in 2012

Berkeley accounted for approximately 15% of all completions in the city.

Within London Berkeley operates a full model employing over 1000 direct

employees across the whole range of requirements from land acquisition,

planning, to project management and sales (including permanent sales offices

overseas). We estimate that approx 80% of sales at Berkeley currently come

from London, with and just under 90% of EBIT.Reflecting the assumption of house price inflation we upgrade by 2-7%

Within our forecasts we now assume 3% inflation in 2014 onwards, seen in

the form of higher selling prices for Berkeley from FY 16 onwards giving the

forward selling of the group. This we believe has an impact on both average

selling price but also margin (where our forecasts are now approx 100bps

ahead of the margin reported on the group’s land bank). We remain content to

include this higher profitability reflecting our analysis of the strong margins

available on sites coming through in that period.

Figure 52: Berkeley London Key data

2013 % group 2016 % group

Est Central London completions 2,598 70% 2,590 70%

Est London Completions 2,598 70% 2,590 70%

Est London ASP 422,599 1.19x 518,919 1.15x

Est London revenue (£m) 1,098 80% 1,394 83%

Est London EBIT (£m)* 250 89% 327 88%

Est London EBIT margin 22.7% 1.11x 23.5% 1.06x Source: Company data and Deutsche Bank, , * assuming outside London margin of 13% increasing to 15% in the period

Rating

HoldEurope

United Kingdom

Housebuilders

UK Housebuilders

Company

Berkeley GroupHldgs

Price target upgraded to 2358p

Price at 23 Oct 2013(GBP)

2,434.00

Price Target (GBP) 2,358.00

52-week range (GBP) 2,434 - 1,343.00

Price/price relative

800

1200

1600

2000

2400

7/11 1/12 7/12 1/13

Berkeley Group HldgsFTSE 100 INDEX (Rebased)

Performance (%) 1m 3m 12m

Absolute 7.6 13.4 63.2

FTSE 100 INDEX 3.8 5.2 16.7


Stock & option liquidity data

Market cap (GBP)(m) 2,964.2

Shares outstanding (m) 161

Free float (%) 100

Option volume (und. shrs., 1Mavg.)

–




28 October 2013

Housebuilders



Model updated: 23 October 2013 Fiscal year end 30-Apr 2011 2012 2013 2014E 2015E 2016E

Sales revenue 743 1,041 1,373 1,561 1,810 1,730

Gross profit 210 297 407 468 552 528

EBITDA 137 228 284 336 398 381

Depreciation 1 2 4 0 0 0

Amortisation 0 0 0 0 0 0EBIT 136 226 280 336 398 381

Net interest income(expense) -1 -9 -8 -10 -10 -5

Associates/affiliates 2 -2 -1 0 7 7

Exceptionals/extraordinaries 0 0 0 0 0 0

Other pre-tax income/(expense) 0 0 0 0 0 0

Profit before tax 136 215 271 326 395 383

Income tax expense 42 57 61 77 87 84

Minorities -1 0 0 0 0 0

Other post-tax income/(expense) 0 0 0 0 0 0

Net profit 95 159 210 249 308 298

DB adjustments (including dilution) 0 -31 0 0 0 0

DB Net profit 95 128 210 249 308 298

Cash Flow (£m)Cash flow from operations -233 -163 115 290 453 491

Net Capex -2 73 6 -4 -4 -4

Free cash flow -235 -90 121 286 449 487

Equity raised/(bought back) -30 0 0 0 0 0Dividends paid 0 0 -20 -97 -98 -386

Net inc/(dec) in borrowings 191 -164 -39 0 0 0

Other investing/financing cash flows -9 -10 1 0 0 0

Net cash flow -83 -264 64 189 351 101

Change in working capital -345 -315 -103 22 138 198

Balance Sheet (£m)Cash and other liquid assets 266 3 67 237 237 278

Tangible fixed assets 11 12 16 16 16 16

Goodwill/intangible assets 17 17 17 17 17 17

Associates/investments 0 0 0 0 0 0

Other assets 1,796 2,122 2,321 2,303 2,160 1,943

Total assets 2,090 2,153 2,421 2,574 2,431 2,254

Interest bearing debt 224 61 22 3 -348 -408

Other liabilities 932 993 1,152 1,155 1,150 1,122

Total liabilities 1,156 1,054 1,175 1,159 802 713

Shareholders' equity 929 1,100 1,322 1,474 1,683 1,595

Minorities 4 0 0 0 0 0

Total shareholders' equity 934 1,100 1,322 1,474 1,683 1,595

Net debt -42 58 -45 -234 -585 -686

Key Company MetricsSales growth (%) 20.7 40.2 31.8 13.7 15.9 -4.4

DB EPS growth (%) 19.9 29.3 54.3 10.1 23.8 -3.2

EBITDA Margin (%) 18.4 21.9 20.7 21.5 22.0 22.0

EBIT Margin (%) 18.3 21.7 20.4 21.5 22.0 22.0

Payout ratio (%) 0.0 0.0 46.2 39.5 125.2 34.8

ROE (%) 10.6 15.6 17.3 17.8 19.5 18.2

Capex/sales (%) 0.2 0.2 0.5 0.2 0.2 0.2

Capex/depreciation (x) 1.8 1.0 1.9 na na na

Net debt/equity (%) -4.5 5.3 -3.4 -15.9 -34.8 -43.0

+44 20 754 74030 Net interest cover (x) 92.7 24.1 34.6 33.6 39.8 76.1

Source: Company data, Deutsche Bank estimates

Running the Numbers Financial Summary

Europe DB EPS (GBp) 70.34 90.94 140.36 154.55 191.29 185.24

Reported EPS (GBp) 70.34 112.78 140.36 154.55 191.29 185.24UK DPS (GBp) 0.00 0.00 74.00 75.00

UK Housebuilders BVPS (GBp) 704.30 839.30 1009.14 1125.19

131 131 131 135

285.00 75.00

1242.78 1151.77

138

Average market cap (£m) 1,157 1,620 2,097 3,190 3,297 3,370

Weighted average shares (m) 132

Berkeley Group Hldgs Enterprise value (£m) 1,119 1,678 2,053 2,956 2,712 2,684

Reuters: BKGH.L Bloomberg: BKG LN Valuation MetricsP/E (DB) (x) 12.5 13.6 11.4 15.7 12.7 13.1

Hold P/E (Reported) (x) 12.5 11.0 11.4 15.7 12.7 13.1

P/BV (x) 1.51 1.53 2.07 2.16 1.96 2.11Price (23 Oct 13) GBp 2434.00

FCF Yield (%) nm nm 5.8 9.0 13.6 14.5

1.89

Target price GBp 2358.00 Dividend Yield (%) 0.0 0.0 4.6

7.1

3.1 11.7 3.1

52-week Range GBp 1480.00 – 2434.00EV/Sales (x) 1.51 1.61 1.50

7.4 7.3

1.50 1.55

EV/EBITDA (x) 8.2 7.3 7.2 8.8 6.8

8.8 6.8 7.1

US$ 5,157mIncome Statement (£m)

Company Profile

Market Cap £ 3,190m EV/EBIT (x) 8.2

[email protected]

Berkeley Group Holdings, founded in 1976 by i ts current

Chairman, focuses on the markets of London and South of

Eng land with a wide range o f developments inc luding

complex, mixed-use urban regenerat ion schemes. The

company operates with sevenbrands - Berkeley, St. James,

St. George,St. Edward, BerkeleyFirst, BerkeleyCommercial

and Berkeley Partnership.

1yr Price Performance

Margin Trends

Growth & Profitability

Solvency

Glynis Johnson

1400

1600

1800

2000

2200

2400

2600

Oct-12 Jan-13 Apr-13 Jul-13

BKGH.L F.T. INDEX 100 (Rebased)

0

5

10

15

20

25

11 12 13 14E 15E 16E

EBITDA Margin EBIT Margin

0

5

10

15

20

25

-10

0

10

20

30

40

50

11 12 13 14E 15E 16E

Sales growth (LHS) ROE (RHS)

0

20

40

60

80

100

-50

-40

-30

-20

-10

0

10

11 12 13 14E 15E 16E

Net debt/equity (LHS) Net interest cover (RHS)



28 October 2013

Housebuilders



DB ests anticipate strong growth with upside potential

DB ests still 7% ahead of consensus reflecting our extensive field work

Over the past 4 years since 2009 Berkeley has bought significant amounts of

high value/prime sited development land and as this land is developed out we

forecast a substantial increase in group selling prices and profits. Reflectingour extensive field work our forecasts for Berkeley FY 15 remain 7% ahead of

consensus PBT and while we see earnings progression leveling off post 2016

we believe cash flow generation could surprise consensus through this time.

Figure 53: Completions calculation for group

2013E 2014E 2015E 2016E 2017E

New London developments excl student (A) 520 1,296 1,483 1,220

Estimated completions “lost” from sites trading out (B) -904 -720 -750 -750

Implied change in completions from this analysis from London (A+B) -384 -328 -891 -1,904

Change in student accommodation © 372 216

Completions implied by this analysis (A+B+C+ previous year D) 3712 3,700 3,600 2,821 1,808

DB est (D) 3712 3700 3,700 3,700 3,700 Source: Company data and Deutsche Bank

Figure 54: Average selling price calculation for group

2013E 2014E 2015E 2016E 2017E

Average private ASP of new developments £947,336 £790,074 £728,836 £740,527

Average private ASP of new student £375,309 £345,000

2012 current ASP £330,000 £330,000 £330,000 £330,000

Implied new ASP £424,907 £484,168 £550,617 £630,265

Current forecast of ASP £354,000 £411,000 £485,000 £463,500 £477,405 Source: Company data and Deutsche Bank

Strong profit growth to 2016 driven by new developments in London

Berkeley currently guides for 3,700 unit completions in FY 14 (with a downside

to 3,300 if the bulk of the larger London developments don’t see completions)

and a selling price of £400,000. The company is guiding FY 15 to see little

upside in volumes if at all, but an average selling price which increases

significantly (management not appearing shy of talking up to £500K) - with the

forward sales to date for FY 15 at £630K.

Guidance for completions and selling price appears conservative

Company guidance for FY 14 we believe to be conservative. Firstly with 40% of

the total forward sales being for FY 14 across approx 1750 units this implies a

£430K ASP on the forward sales to date. But more to the point our site by site

analysis of the company’s London developments suggests to us that upside to

guidance is possible. For us the upside in guidance for FY 14 is almost binaryon the timing of the Tower at St George. This development of 223 units we

believe have an average selling price of £2.5m, and as such the development

has a gross development value of over £550m – for a group with a revenue of

£1,372 in FY 13 this is a massive influence. The benefit of the contribution of

Tower at St George’s Wharf we believe management is now showing at least

in part in its FY 15 guidance although even then we are not clear the full

contribution is being included.

DB ests now include 3% house price inflation in London from 2014

Within our forecasts we now assume 3% inflation in 2014 onwards, seen in

the form of higher selling prices for Berkeley from FY 15 onwards giving the



28 October 2013

Housebuilders



forward selling of the group. This we believe has an impact on both average

selling price but also margin (where our forecasts are now approx 100bps

ahead of the margin reported on the group’s land bank). We remain happy to

include this higher profitability reflecting our analysis of the strong margins

available on sites coming through in that period.

We see upside to Berkeley’s reported gross margin on its land bank.

Berkeley reports its land bank has a gross margin potential of 29.4%. However,

we believe this is an underestimation of its true potential reflecting the scope

for optimisation of its land bank that the company look to achieve (ie

increasing the number of residential units on a development) and in terms of

the management’s inherent conservativeness in disclosure. Over the past 4

years Berkeley Group has made very significant land purchases. With the large

proportion of its land bank being “new” we believe this implies that there is a

wide range of sites on which Berkeley has yet to achieve significant

optimisation in its planning, and the company themselves target 5%

optimisation pa. Part of this optimised planning we see as the recent trend to

increase the number of private units on developments through the buyout of

affordable (ie paying money instead of building the level of affordable requiredfrom the section 106 obligations agreed at the time of planning grant) as well

as possible upside from the Montague review (which suggested the

replacement of affordable housing by units for private rental). We believe

optimisation of just 5% pa could drive the 70-80bps of gross margin on its land

bank (assuming build cost offsets house price inflation). This suggests margins

on a 2 year basis could reach close to 31%, more should the benefits of house

price inflation exceed build and land cost increases. Work we have done on

selected sites looking at the purchase price, build costs, costs of planning

obligations including social appears to show current sites achieving a gross

margin significantly in excess of that reported on the land bank as a whole.

St Edwards joint venture is set to become more important.St Edwards is a 50:50 joint venture between Berkeley and Prudential. Over the

recent years this has been a relatively small operation with only a development

in Stanmore Place in North London. However, in the last 2 years the joint

venture has picked up 2 significant sites: one at 375 Kensington High Street

(539 units) and the other at 190 The Strand (206 units). Management see 190

The Strand as one of the best examples of the quality of product and location

(and we have moved our ASP for 190 The Strand up considerably in our

forecasts). However, for us 375 Kensington High Street is the more interesting

with the largest gross development value of any of the Berkeley sites. Berkeley

Group takes the post tax profits from St Edwards in its associate line. Based on

our expectation that these 2 developments can generate 20% EBIT margins

then we see this jv contributing over £7m from FY 15 and £10.8m from 2018-

2022.



28 October 2013

Housebuilders



Figure 55: Expected profit from St Edwards

Total completions from JV £m pa

375 Kensington High Street 35

190 The Strand 25

Total new completions 60

Assumed new completions due to Berkeley (50% of total) 30ASP of JV

375 Kensington High Street £1,300,000

190 The Strand £1,067,476

Average ASP £1,203,115

Est 20% EBIT @20% margin 14.4

After tax profit taken into P&L JV line 10.8 Source: Deutsche Bank

Strong sustainability of returns across the group

Over the past 4 years Berkeley has taken on a significant number of land deals

of differing size and type from 190 The Strand being an conversion, LondonDocks being the old Wapping newspaper site, to smaller sites of high value

housing in Wimbledon. However the main thread that ties these purchases

together are either ones of strong relationships with planners and land owners,

or ability to consider larger sites or more complex planning/build. Berkeley

prides itself on being one of the few developers able to take on as they

describe “messy” sites and it is this which we believe allows it to continue to

purchase land at this time without facing some of the competition issues being

seen by the pure developers.

Experienced management allows access to large and complex

developments.

Within its operations Berkeley operates a sub-contract

model, project managing the majority of its sites. The company views

that the complex projects which it operates require intensive

management and as such it will recruit project managers either

internally or externally depending on the project requirements (it views

strong project managers as a scarce and valuable resource). This sub-

contract model the company views as essential for its model citing

control of quality (to avoid value engineering of key items such as a

installing a slower lift), timing and specification (being able to

accommodate either Berkeley or the customer changing their mind on

specification or finish) as well as build cost savings as important

(through the build of Battersea Reach the ballast being dug out in the

early stages had a considerable value). In isolated cases Berkeley will

use a main contractor (such as the frame and envelope of The Tower

at St George) although it will generally always control the fit out andtechnical internal issues.

Focus on sites where competition levels are less. In its land purchases

Berkeley focuses on larger sites – its balance sheet supporting it in

looking at developments that many of its peers cannot afford or are

unwilling to invest the capital employed. Within London Berkeley also

views that its planning, technical and project management expertise

allows it to consider sites which others view as too complex. Issues

such as vacant possession, sensitivities with neighbours, rights of

light, land remediation all are issues Berkeley are willing and able to

accommodate in order to make the desired margin on new sites.



28 October 2013

Housebuilders



Strong provisioning by the group should smooth earnings for the medium term

We believe Berkeley actively smooths earnings through provisions, and

attempting to show this through the difference in reported tax and cash tax

suggesting that the company provisioned by as much as £40m through the

previous year. These provisions we believe tend to be released when growth

tails off (when new site openings more correlate with site closures) and as

such these tend to smooth results over the medium term.

Figure 56: Attempts to calculate provisions at Berkeley

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Tax in P&L (44.3) (53.1) (59.3) (66.5) (67.7) (41.4) (43.7) (52.5) (56.5) (34.3) (30.8) (41.8) (56.7)

Tax paid* (46.0) (60.0) (46.6) (62.6) (59.8) (35.4) (51.5) (50.9) 8.7 (12.4) (32.6) (53.7) (69.2)

Difference** 1.7 6.9 -12.8 -3.9 -8.0 -6.0 7.8 -1.7 -65.2 -21.9 1.8 11.9 12.5

Possible difference in PBT*** 5.6 22.0 -42.2 -13.0 -27.1 -22.8 29.5 -5.9 -224.4 -76.9 6.5 38.7 40.7

Reported PBT 143.6 169.8 196.2 221.2 229.8 157.1 165.1 188.1 194.3 120.4 110.3 136.2 184.1 Source: Company data and Deutsche Bank *(taken from subsequent year), ** a positive figure is a possible understate of profit, a negative is a possible overstatement of profit compared *** based on the difference between taxreported and paid in subsequent year, multiplied up by the tax rate

Figure 2: Attempts to calculate provisions at BerkeleyDividend we believe retains ability to surprise

A 10 year programme looking to return £13/share to shareholders

In June 2011 Berkeley proposed £13/share of dividends over the next 10 years

(£1.7bn in total) and the company provided backstop dates for these payments

(£4.34/share in Sep 15, and £4.33 in each of Sep 18 and Sep 21). Achieving

these payouts at or before the stipulated times are a key constituent of the

new long-term incentive programme for board members. With this new

dividend programme the company did not view it was “calling the top” in the

land market (as it did with its first programme in 2004). Instead the message

this time was more that given the group’s focused business model the

company views it has a natural size dictated by the level of managementcapacity.

Further bring forward of dividend likely

As of Sep Berkeley has paid 74p of the total of 434p dividend due by Sep 15.

With this bringing forward of the dividend we believe will provide the market

confidence in Berkeley’s growth potential. Berkeley resists the urge to set a

dividend policy, however the FD suggests that it should be viewed in terms of

earnings (although he wouldn’t commit to whether this was earnings in the

year which the dividend relates or the group’s expectation of future earnings).

While the cash pay-out for FY 13 (£97m) was similar to the cash generation

over the period (£102m) management indicated that was more of a

coincidence and it shouldn’t be assumed that dividends will continue to be

equal to cash flow generation. In our model we now assume dividend payoutof 2.5x cover for the interim periods before the drop-dead dividend dates. This

moves the value of the dividends in our discount model to 1049p (discounted

back at 6%).



28 October 2013

Housebuilders



Figure 57: Calculation of share price target

2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E

Dividend stream 75 285 75 75 283 433 0 0

NTAV 0 0 0 0 0 0 0 1990

Rental fund 6

Commercial 7Total cash stream and NTAV 81 285 75 75 283 433 0 1,997

Year 0 1 2 3 4 5 6 7

PV of cashflows 81 277 69 65 231 333 0 1,302

NPV of cash flow 2,358

Discount rate for NTAV 8%

Multiple of NTAV 80%

Discount rate for dividend 6% Source: Deutsche Bank

Figure 58: Calculation of share price target

p/share

2021E NAV/share 1200

Intangible assets 11

2021 NTAV/share 1189

Multiple of NTAV 1.8

Value of NTAV 2021 2141

Discounted adjusted NTAV 1298

Rental fund value 6

Commercial 4

Pension 0Dividends 1049

Price target 2358 Source: Deutsche Bank



28 October 2013

Housebuilders



Figure 59: Berkeley completions

2014E 2015E 2016E 2017E

Other completions London 2,068 1,368 774 226

Emerald House (Arton Wilson), Roehampton (St James) 82 45

Goodmans Fields- 75 Lehman Street 25 31Lime Grove Mews, Hammersmith (St James) 69

Marine Wharf, Deptford 150 150 150 82

The Tower, One St George Wharf, SW8 (St George) 100 123

Wellington Gate, Atkinson Morley, Wimbledon Hill Park 8 71

Fulham Reach, Hammersmith (St George) 38 150 150 150

One Tower Bridge (Potters field) 48 34 94 177

Goodmans Fields, London E1 200 200 354

Kew Bridge West, Brentford (St James) 125 120 75

Marryat Place, Wimbledon 6

Hurlingham Gate, Sullivan Road, Fulham (SW 6) 85 64

Carmelite Monastery, Bridge Lane, Finchley, NW 11 65

Abell & Cleland House, Westminster 100 104Merano Residences, 30-34 Albert Embankment 50

Chambers Wharf, Bermondsey 180

Hampton House, 20 Albert Embankment 142 100

Ebury Square (Johnson House) 31 30 28

Queens Rise, Richmond 8

Riverlight, Battersea 150 150

Roman House, City of London 90

Sir Alexander Close, Acton, W3 20

Royal Mail sorting office Twickenham 115

One Blackfriars, Southwark (St George)

City Forum, 250 City Road, Islington

Section House (Finchley)London Docks (Wapping)

Sovereign House, Hammersmith (nr Kingsmall)

Chiswick

Latchmere House Richmond

South Quay Plaza

St Joseph’s, Mill Hill

9 Millbank/Ergon House (?)

1 Crown Place

White City

QVC building, Battersea

Southall Gas Works (National Grid)

Principal Place?

Student accommodation

Goodmans Fields, London E1 205

Medway 167

NEC Acton 216

London completions 2,960 2,880 2,257 1,446

Completions outside London 740 720 564.2 361.6

Completions implied by this analysis 3,700 3,600 2,821 1,808

DB ests of completions 3,700 3,700 3,700 3,700 Source: company data and Deutsche Bank



28 October 2013

Housebuilders



Figure 60: Berkeley average selling price

2014E 2015E 2016E 2017E

Emerald House (Arton Wilson), Roehampton (St James) £497,466 £608,080

Goodmans Fields- 75 Lehman Street £774,732 £774,732

Lime Grove Mews, Hammersmith (St James) £740,000

Marine Wharf, Deptford £367,857 £367,857 £367,857The Tower, One St George Wharf, SW8 (St George) £2,237,668 £2,372,197

Wellington Gate, Atkinson Morley, Wimbledon Hill Park £3,500,000 £2,084,507

Fulham Reach, Hammersmith (St George) £698,000 £698,000 £698,000 £698,000

One Tower Bridge (Potters field) £998,436 £1,025,716 £1,269,897 £1,131,017

Goodmans Fields, London E1 £443,634 £443,634 £443,634

Kew Bridge West, Brentford (St James) £365,655 £365,655 £365,655

Marryat Place, Wimbledon £3,000,000

Hurlingham Gate, Sullivan Road, Fulham (SW 6) £575,168 £575,168

Carmelite Monastery, Bridge Lane, Finchley, NW 11 £481,111

Chambers Wharf, Bermondsey £250,000

Abell & Cleland House, Westminter £600,000 £600,000

Merano Residences, 30-34 Albert Embankment £965,000Hampton House, 20 Albert Embankment £672,004 £672,004

Ebury Square (Johnson House) £4,598,371 £4,598,371

Queens Rise, Richmond £1,000,000

Riverlight, Battersea £635,333 £635,333

Roman House, City of London £806,616

Sir Alexander Close, Acton, W3 £700,000

Royal Mail sorting office Twickenham £350,000



Section House (Finchley)

London Docks (Wapping)

Sovereign House, Hammersmith (nr Kingsmall)Chiswick

9 Millbank/Ergon House

Latchmere House, Richmond

South Quay Plaza



1 Crown Place

White City




Goodmans Fields, London E1 £399,999

Medway £345,000

NEC Acton £345,000

ASP of new London developments £855,173 £789,358 £713,358 £760,676

Implied new ASP £411,445 £483,929 £542,055 £645,003

Current forecast of ASP £411,000 £485,000 £463,500 £477,405 Source: company data and Deutsche Bank



28 October 2013

Housebuilders



Figure 61: Berkeley revenue (equivalent to Gross Development Value) by site

2014E 2015E 2016E 2017E

Emerald House (Arton Wilson), Roehampton (St James) 41 27 0 0

Goodmans Fields- 75 Lehman Street 19 24 0 0

Lime Grove Mews, Hammersmith (St James) 51 0 0 0

Marine Wharf, Deptford 55 55 55 0The Tower, One St George Wharf, SW8 (St George) 224 292 0 0

Wellington Gate, Atkinson Morley, Wimbledon Hill Park 28 148 0 0

One Tower Bridge (Potters field) 48 35 119 200

Fulham Reach, Hammersmith (St George) 27 105 105 105

Goodmans Fields, London E1 0 89 89 157

Kew Bridge West, Brentford (St James) 0 46 44 27

Marryat Place, Wimbledon 0 18 0 0

Hurlingham Gate, Sullivan Road, Fulham (SW 6) 0 49 37 0

Carmelite Monastery, Bridge Lane, Finchley, NW 11 0 31 0 0

Chambers Wharf, Bermondsey 0 45 0 0

Abell & Cleland House, Westminster 0 0 60 62

Merano Residences, 30-34 Albert Embankment 0 0 48 0Hampton House, 20 Albert Embankment 0 0 95 67

Ebury Square (Johnson House) 0 0 138 129

Queens Rise, Richmond 0 0 8 0

Riverlight, Battersea 0 0 95 95

Roman House, City of London 0 0 73 0

Sir Alexander Close, Acton, W3 0 0 14 0

Royal Mail sorting office Twickenham 0 0 40 0



Section House (Finchley)

London Docks (Wapping)

Sovereign House, Hammersmith (nr Kingsmall)Chiswick



South Quay Plaza



1 Crown Place

White City




Costume Store, Acton (STUDENT ACCOM) 0 0 0 0

Goodmans Fields, London E1 82 0 0 0

Medway 58 0 0 0

NEC Acton 0 75 0 0 Source: company data and Deutsche Bank



28 October 2013

Housebuilders



Figure 62: Future developments not yet in forecasts

Comments

Chambers Wharf 600 units on site subject to Super-sewer on site

One Blackfriars, Southwark (St George) 50 storey tower, with 85 units although the company is looking for planning to double this by reducinghotel and removing shared ownership

City Forum, 250 City Road, Islington Still occupied, Planning achieved in 2009 but then reviewed. Still on going

Section House (Finchley) 97 units

London Docks (Wapping) 1300 units is first guidance

Sovereign House, Hammersmith (nr Kingsmall)

Chiswick



South Quay Plaza 800 units

St Joseph’s, Mill Hill 69 units

9 Millbank/Ergon House (?) 49 units

1 Crown Place

White City >2000 new homes

QVC building, Battersea 456 apartments

Southall Gas Works (National Grid) Up to 4,500 new homes Source: Deutsche Bank



28 October 2013

Housebuilders



Reuters Bloomberg

BDEV.L BDEV LN

London we see as a quality and sustainable asset for Barratt

For Barratt, London we believe is a significant asset. With a full development

model, able to tackle more complex builds, we believe the company ought to

be able to see strong sustainable returns from the region over the cycle. Webelieve London ought to provide a strong supplement to group earnings

growth and ROCE in the coming years. Barratt currently trades at 1.25x 2014E

NTAV. This we view as too cheap for a stock offering strong earnings

momentum and an above-sector average high teen ROCE on a 2 year view.

London: an important contributor to Barratt

Barratt guides that London completions in FY 13 accounted for approx 12% of

group volumes (10.3% on a consolidated basis). However with significantly

higher average selling price and greater profitability (reflecting the strength of

the market, house price inflation seen to date, and the product mix) we believe

that London accounts for approx 27% of EBIT incl associates.

But growth in future years leveraged on the remainder of the UK

Barratt targets significant growth from its London division over the coming 4years anticipating to move from 1586 completions including jvs to 2000-2200.

However while we believe this growth should be achievable given its land

bank and full development model, we forecast the % of reported EBIT from

London to remain relatively unchanged as higher margin new land from the

rest of the UK becomes more apparent in the group P&L. However with sharp

growth in the contribution from joint ventures in the capital EBIT from London

including associates is forecast to rise to 29% of group.

Figure 63: Barratt London Key data

London 2013E % group 2015E % group

Completions *1362 10.3% 1600 10.3%

Est ASP **£293,645 1.51x £400,000 1.86xEst Revenue (£m) 402 13.5% 640.0 19%

Est EBIT and associates (£m) 66.7 26.4% 152.9 28.6%

Est EBIT and associates margin 16.7% 1.72x 23.9% 1.49x

Outside London 2013E % group 2015E % group

Est Completions 11,884 89.7% 13,882 89.7%

Est ASP £185,649 0.95x £195,245 90.9%

Est Revenue (£m) 2206.3 86.5% 2710.4 0.80x

Est EBIT and associates (£m) 193.6 73.6% 417.4 71.4%

Est EBIT and associates margin 8.8% 0.90x 15.4% 0.96x Source: Company data and Deutsche Bank, incl jv 1586 – 11.7% of group, **incl jv £284K

Rating

BuyEurope

United Kingdom

Housebuilders

UK Housebuilders

Company

BarrattDevelopments

London should continue to be strongcontributor

Glynis Johnson

Research Analyst

(+44) 20 754-74030

[email protected]

Price at 23 Oct 2013

(GBP)

339.3

Price Target (GBP) 391.00

52-week range (GBP) 355.20 - 181.30


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FTSE 100 INDEX (Rebased)


Absolute 3.2 -3.0 89.4

FTSE 100 INDEX -0.5 -0.6 12.8





Free float (%) 100


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28 October 2013

Housebuilders



Model updated: 23 October 2013 Fiscal year end 30-Jun 2011 2012 2013 2014E 2015E 2016E

Sales revenue 2,035 2,323 2,606 2,963 3,350 3,663

Gross profit 230 298 361 505 655 753

EBITDA 151 200 186 390 536 633




Associates/affiliates 0 0 8 28 35 27

Exceptionals/extraordinaries -47 0 0 0 0 0


Profit before tax -12 100 105 359 519 613




Net profit -14 67 75 278 405 490

DB adjustments (including dilution) 39 11 67 0 0 0

DB Net profit 26 78 142 278 405 490

Cash Flow (£m)Cash flow from operations 100 150 81 128 232 333

Net Capex -1 6 2 -4 -4 -4

Free cash flow 100 155 83 125 228 329

Equity raised/(bought back) 0 6 0 0 0 0Dividends paid 0 0 0 -25 -93 -135

Net inc/(dec) in borrowings -518 -77 17 0 0 0

Other investing/financing cash flows -55 -7 -11 0 0 0

Net cash flow -474 78 89 100 135 194

Change in working capital 0 0 0 0 0 0





Other assets 3,805 3,704 3,664 3,773 4,041 4,227

Total assets 4,775 4,753 4,854 5,010 5,416 5,797

Interest bearing debt 417 343 349 294 294 294

Other liabilities 1,429 1,436 1,432 1,429 1,529 1,579

Total liabilities 1,845 1,779 1,781 1,723 1,823 1,873

Shareholders' equity 2,930 2,974 3,073 3,322 3,631 3,982


Total shareholders' equity 2,930 2,974 3,073 3,322 3,631 3,982

Net debt 344 193 54 -45 -181 -375

Key Company MetricsSales growth (%) 0.0 14.1 12.2 13.7 13.1 9.3

DB EPS growth (%) nm 200.6 78.1 96.2 45.6 21.1

EBITDA Margin (%) 7.4 8.6 7.1 13.2 16.0 17.3

EBIT Margin (%) 6.3 7.8 6.3 13.1 16.0 17.2

Payout ratio (%) nm 0.0 32.5 32.5 32.5 32.5

ROE (%) -0.5 2.3 2.5 8.7 11.7 12.9

Capex/sales (%) 0.0 0.1 -0.1 0.1 0.1 0.1

Capex/depreciation (x) 0.4 1.5 -1.3 2.4 2.4 2.4

Net debt/equity (%) 11.7 6.5 1.8 -1.4 -5.0 -9.4




Europe DB EPS (GBp) 2.65 7.97 14.20 27.86 40.56 49.10

Reported EPS (GBp) -1.44 6.88 7.51 27.86 40.56 49.10UK DPS (GBp) 0.00 0.00 2.50 9.29


964 974 974 974

13.52 16.37

372.88 408.97

974

Average market cap (£m) 945 1,042 2,139 3,304 3,304 3,304


Barratt Developments Enterprise value (£m) 1,289 1,235 2,193 3,259 3,123 2,929

Reuters: BDEV.L Bloomberg: BDEV LN Valuation MetricsP/E (DB) (x) 37.0 13.6 15.5 12.2 8.4 6.9

Buy P/E (Reported) (x) nm 15.7 29.2 12.2 8.4 6.9


FCF Yield (%) 10.5 14.9 3.9 3.8 6.9 10.0

1.10


4.6

2.7 4.0 4.8


6.8 13.3

0.93 0.80

EV/EBITDA (x) 8.5 6.2 11.8 8.3 5.8

8.4 5.8 4.6


Company Profile


[email protected]

Barratt Developments, foundedin 1958and headquartered in

London, is one of the largest housebuilders in the UK with

national presence. The company acquired Wilson Bowden in

2007 for £2.7bn. The company owns three b rands fo r i ts

res idential developments - Barratt Homes, David Wi lson

Homes and Ward Homes. I t a lso owns the Wi lson Bowden

Developments brand under which it focuses on commercial

property development business.


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London is an important contributor to Barratt growth

But growth in future years leveraged on the remainder of the UK

Barratt targets significant growth from its London division over the coming 4

years, targeting to increase from just under 1700 completions in FY 13 to

2000-2200 in 5 years (2000 targeted for 2016). Barratt targets significantgrowth from its London division over the coming 4 years anticipating to move

from 1586 completions including jvs to 2000-2200. However while we believe

this growth should be achievable given its land bank and full development

model, we forecast the % of reported EBIT from London to remain relatively

unchanged as higher margin new land from the rest of the UK becomes more

apparent in the group P&L. However with a sharp growth in the contribution

from joint ventures in the capital EBIT from London including associates is

forecast to rise to 29% of group. Within this analysis we have used company

guidance for the timing of the completions across a period, however we have

used on field work and industry knowledge to forecast the actual completions

each year

Figure 64: Barratt London developments the timing of private completions in JV YE June 2013 2014 2015 2016

Private 1229 891 1503 986

Social 133 154 321 358

Joint ventures 224 576 550 350

Total completions 1586 1621 2374 1694

Barratt target 1586 2000 Source: Company data and Deutsche Bank

Strong growth in joint ventures from London

Over the past 4 years some of the major sites in London for Barratt have been

bought on a joint venture structure. This was originally done, in our opinion, in

a bid to reduce the capital employed committed to any single project, howeverthis rationale has been supplemented in the last 18 months by a strategy to

use joint venture partners where they bring either assets (such as land), or

other opportunities. For the group as a whole its joint ventures in London we

believe will represent a strong supplementary income (taken in the associate

income line below EBIT) with the sites showing a strong ASP than the group as

a whole and each with a significant GDV. Our forecast for associate income is

based on a forecast of GDV and timing of completions given by management.

As such this does not include any benefit of house price inflation for the

region.

Figure 65: Estimated joint venture income

FY 14 FY 15 FY 16 FY 17Altitutde 14.5 GDV £116m

Aldgate Place 12.7 12.7 GDV £254m

Queensland Terrace, Islington 8.6 8.6 GDV £137m

Fulham Riverside 13.2 13.2 13.2 GDV £438m

Hendon Waterside 4.3 GDV £43m

Enderby Wharf 11.0 GDV £275m

Regional 0.9 0.9 0.9 0.9

Total 28.3 35.4 26.8 25.1

Company guidance 25 30 Na na Source: Company data and Deutsche Bank



28 October 2013

Housebuilders



ASP in London to benefit from mix change

Last year Barratt reported an average selling price in its London business of

£284,000 incl jv (£293 excl jv). However Barratt’s land bank in London for

owned and conditional land has an average selling price of just over £380K,

implying the company should be able to show a significant increase in average

selling price from mix in the coming years (even without the benefits of house

price inflation). However within our forecasts we now assume 3% house price

inflation in the region from 2014, reflecting in an ASP from its owned and

conditional land for 2016 of approx £400K.

Figure 66: Average selling price in London

London Owned Conditional Owned andconditional

Jv owned andconditional

Jv approved Total

Number of plots 3,421 1,443 4864 2,216 2,645 9,725

No of sites 21 7 28 5 2 35

GDV 1,257 599 1,856 1,211 900 3,967

ASP £354K £405K £381K £537K £339K £399K Source: Company data and Deutsche Bank,

Continuing to see land opportunities in London.

Through 2013 management indicates that this region will purchase approx

2,500 units of land, indicating that the business is targeted to grow. The

company continues to see strong opportunities in London particularly in the

larger sites with a number of larger opportunities that it is bidding on (Baker

Street and also an asset from CBRE).

Full development model suggests more sustainable returns

Experienced management allows access to large and complex developments

Barratt’s London operations are run by Alistair Baird (who has run the business

in London for Barratt since 1986) and a management team of 2 others whichtogether bring over 60 years experience. This team appears to have an in-

depth knowledge of the London market and a range of experience to be willing

to take on big complex projects. This history, experience and expertise we see

as a strong advantage Barratt has over some of the more recent entrants.

Barratt has more significant resource in London commensurate with its size,

with approx 450 people employed. This team on the ground the management

believes allows it a better understanding of what may or may not be granted in

terms of planning (providing invaluable data essential for an viability study), to

develop strong relationships with land vendors, to tackle more complex builds,

and to more control the selling process.

London: scope to provide more consistent profits over medium termWithin London Barratt operates a full development model and in all of its

developments Barratt sub-contracts the build, taking the project management on

itself. Having the resources to develop large and complex sites Barratt believes is

a significant advantage and it sees the natural peers in this region as Berkeley

Group. At this time given the resources on the ground in London that Barratt

while still making strong margins (we believe of approx 15% EBIT) its profitability

we believe is below some of those running pure development models (reflecting

its greater resource employed in the region and also some of the older sites

bought pre downturn on which it still trades). However we believe that Barratt’s

skills and expertise have already and should in the future allow it access to

developments where competition levels are lower, so suggesting it should be

able to see a more consistent margin over the cycle. We believe this London

Breakdown of Barratt resource in

London# of employees

Technical 55

Construction 135

Sales and marketing 90

Land and planning 25

Commercial 70

Finance 30

Admin & Other 45 Source: Deutsche Bank



28 October 2013

Housebuilders



business managed well, while not necessarily increasing the proportion of its

profits to group in the coming years (due to the nationwide housing market pick-

up) should provide a greater base load of profits for the group in the medium

term, perhaps allowing a better smoothing of margins over a cycle.

Strong relationships with vendors continue to offer opportunities

Barratt’s London management views its business as gaining momentum in its

presence. It sees this in terms of repeat business from land vendors as well as

its strong relationship with public bodies (purchasing Catford Stadium in

Lewisham from the GLA and Trenchard in Westminster from the government),

commercial enterprises such as Sainsbury (Fulham, Nine Elms), financial

institutions (Greenwich), real estate companies (such as British Land for

Aldgate Place) and housing associations (such as L&Q in Altitude, Queensland

Terrace, Fulham Riverside and Nine Elms).

Full build model allows control of build

Barratt believes its full development model not only allows it to save the main

contractors margin and on some occasions to actually capture build savings

(saving 15% of build costs on some projects), but also allows them to properlyensure the quality of build and gives flexibility of timing. For larger projects

where a number of changes may well be made through the life of the site

(including planning optimisations, altering the build process reflecting

experience on site, adapting to changes in materials etc) Barratt management

views sub-contracting as essential. Project managers and teams capable of

handling complex builds” are a sought after asset and Barratt sees being able

to provide them with a consistent work load provides a significant advantage

to the larger developers for securing their services.

Fulham Riverside – building a new Sainsburys and with the development on top

and around the sides involves significant structural engineering including a

metre thick slab on top of the Sainsburys. This site sees 61,000m3

of concrete(200 lorries a day) and 6 tower cranes on site.

Altitude, Aldgate. During the build the cladding contractor (the material on the

outside of the build) went bankrupt. After weighing up the options in terms of

alternative suppliers the company then set up an agreement with the original

cladding contractor to ensure supply of the product for the rest of the building. A

competitor, Barratt reports, saw a 3 month delay to build with the main

contractors on this build unable to secure continuity of their supply.

A balanced portfolio of product, geography and customer

A balanced portfolio of developments

In its London business Barratt seeks a balance of developments ranging across

£200-£2,400 square foot with its core between £600-£1700 square foot, with

selling prices ranging from £160K to £6m. This, the company sees, as the core

range of demand in the housing markets, and it believes by diversifying across

this range ought to more insulate the company from incidents of oversupply.

A differentiated product should provide greater sustainability of demand

In London Barratt sees using its in-house sales and marketing people as

bringing a significant edge over those who use local estate agents. Local

knowledge, understanding of the development and focus of sales force are

seen as essential tools in conveying the quality of the product. The company



28 October 2013

Housebuilders



also believes it is the only one which offers a 5 year fixture and fittings

guarantee and it believes this provides a competitive edge. Barratt owns its

own management company (which handles the after sales property

management), which while not a profit centre the company believes is a key

value to customers (and maintains the strong brand of the company after a

development is finished). The company also believes its product is

differentiated by its quality, good design and space standards (which it

maintains by sub-contracting its build rather than passing it over to a main

contractor who may value engineer parts of a project). The company sees

these competitive advantages as leading to greater sales price and sale

performance, providing examples of outselling competitors on nearby sites.

Overseas buyers are less of a driver for Barratt than we previously thought

While selling units to overseas buyers, Barratt has a lesser reliance on this than

we previous thought - <12% of total completions to non-domestic buyers. The

company sees the overseas buyers as a valuable source of demand, and

reports it is comfortable for them to increase to up to 20% of volumes in the

region. However it highlights that the participation of the overseas buyers as

dependant on the type of site, eg it marketed its St Andrews development inHong Kong, its Courthouse (Westminster) site sold 40 units overseas, while its

Newham developments have not been marketed at all overseas.

Figure 67: % of sales of selected developments to overseas buyers

% of overseas buyers % UK investors % owner occupiers

Barratt 15% 29% 56%

Renaissance, Lewisham 12%

Dalston Square, Dalston 28%

Maple Quays, Canada Water 35%

St Andrews, Bromley by Bow 40%

The Courthouse, Horseferry Road Westminster 78%


Investment thesis for Barratt

Post its recent strong share price performance Barratt now trades at a premium

to NTAV. However with scope for above sector average, high teens ROCE,

increasing confidence of reaching zero net debt by FY 15, as well as significant

leverage to a new build market pick-up, we see further upside potential. BUY

Figure 68: Barratt price target calculation

NAV/share 2016 399

Intangible assets 89

NTAV/share 309


Value of NTAV 433


Dividends to that point 21

Price target 394 Source: Deutsche Bank

Risks

Risks include a slowdown in volumes, a drop in average selling price, and a

lower margin on new land than reported.



28 October 2013

Housebuilders



Figure 69: DB ests of Barratt London developments the timing of private completions

Private completions 2013E 2014E 2015E 2016E

The Apartments, Battersea 46

Brixton Square, Brixton 50 57

Evolution, Edgeware 0 50 100 100

Great West Quarter, Brentford 150 100 63Maple Quays, Canada Water 250 9

St Andrews, Bromley by Bow 100 66 65

Osiers, Wandsworth 89 93

The Courthouse, Horseferry Road Westminster 30 99

Trenchard House, Soho 3 10

Redwood Park, Rotherhithe 50 50 61

Dalston Square, Dalston 45 3

Renaissance, Lewisham 150 91 90 90

New South Quarter, Croydon 120 130 130 125

Vickers Green Crayford 44 35

Waterside Park, Royal Docks 139 125 125 125

The Primary, Southall 21Lavender Gardens, Mitcham 30 39 40

Greenland Place

Edgware Green 60 30 60 60

Great Minster East, Westminster 60

Ladywell Village, Catford 80 100

Blackfriars Road, Southwark 145 80

Cannon Wharf, Surrey Quays 150 75

Westleigh Rise, Putney 95 50

Chandos Way, Golders Green 40

Delta, Deptford 21

The Park House, Acton

Cane Hill, Croydon 80Camden Road, Camden 85

Total 1229 891 1503 986

Joint venture completions

Hendon Waterside, Henden (Metropolitan jv) 191 150 150 150

Queenstown Terrace, Islington (L&Q) 150 225

Fulham Riverside (L&Q) 100 75 100

Enderby Wharf, Greenwich (Morgan Stanley) 150

Altitude, Aldgate (L&Q) 176

1-2 Aldgate Place, Islington E1 (British Land) 100 100

Sainsburys Nine Elms (Jv with L&Q)

Total 224 576 550 350




28 October 2013

Housebuilders



Figure 70: Developments under construction detail

Total Units Private Affordable Start Completion(1)

Brixton Square, Brixton 155 107 48 2012 Q4 2013

Evolution, Edgware 937 548 389 2009 Q3 2018

Great West Quarter, Brentford 885 500 385 2006 Q4 2014

Maple Quays, Canada Water 900 666 234 2008 Q2 2013St Andrews, Bromley-by-Bow 964 554 410 2009 Q2 2015

Osiers, Wandsworth 275 186 89 2011 Q4 2013

The Courthouse, Westminster 129 129 0 2012 Q4 2014

Trenchard House, Soho 78 13 62 2012 Q2 2015

Redwood Park, Rotherhithe 212 161 51 2013 Q1 2016

Dalston Square, Dalston 550 487 63 2007 Q3 2013

Renaissance, Lewisham 770 602 186 2010 Q2 2016

New South Quarter, Croyden 448 448 0 2010 Q2 2016

Vickers Green, Crayford 201 201 0 2012 Q1 2015

Waterside Park, Royal Docks 780 510 270 2010 Q2 2016

The Primary, Southall 143 82 61 2011 Q1 2014

Lavender Gardens, Mitcham 126 86 40 2012 Q4 2014Joint ventures

Altitude, Aldgate (JV-L&Q) 235 171 64 2011 Q2 2014

Fulham Riverside (JV-L&Q) 462 396 66 2012 Q4 2017

Queensland Terrace, Islington (JV-L&Q) 375 375 0 2012 Q2 2015 Source: Company data (1) calendar year quarters

Figure 71: Future developments detail

Terms agreed Total Units Private Affordable

Ladywell Village, Catford 589 416 173 GDV £118m at ASP £200340

Blackfriars Road, Southwark 368 255 113 GDV £164m

Great Minster East, Westminster 60 60 0 GDV £95m, ASP £1583333

Cannon Wharf, Surrey Quays 679 562 117 GDV £222m, ASP £326951Westleigh Rise, Putney 145 140 0 GDV £100m ASP £689655

Chandos Way, Golders Green 45 na na na

Camden Road, Camden 169 85 84 GDV £275m, ASP £426036

Conditional land?

Delta, Deptford 59 38 21

The Park House, Acton na na na

Cane Hill, Croydon 650 487 163 GDV £250m, +70K sqft commercial, to secureplanning mid 2014?

Terms agreed jv

Sainsburys Nine Elms (Jv with L&Q) 645 na na

1-2 Aldgate Place, Islington E1 (British Land) 463 na na GDV £254m

Hendon Waterside, Henden (Metropolitan jv) 2000 na na GDV £43m

Enderby Wharf, Greenwich (Morgan Stanley jv) 770 na na £275m, ASP £357143 Source: Company data



28 October 2013

Housebuilders



Reuters Bloomberg

BWY.L BWY LN

London contributes up to 20% of sales

In FY 13 Bellway reported 15.3% of its completions from London, and approx

18% of turnover (focusing on the more affordable private market in London

implies the % contributions from completions and revenues are relativelysimilar). However with operating margins we believe above group average we

calculate EBIT from its London operations to be >20% of group. Currently

Bellway runs approx 22-23 active sites pa with 16 in the later stages of

opening. Targeting further growth management believes this business could

contribute up to 20% of turnover at any one time.

Seeking London on a de-risked basis

Within London Bellway’s general remit is for developments aimed at

“affordable London”. This it feels is an average selling price of £250K, feeling

this to be a position in the market where there is significant domestic demand

and also undersupply. While Bellway runs a more full model in London than

many of its peers, it main contracts approximately half of its developments

(approx 12) where it doesn’t have the resource to build. Where it maincontracts Bellway recognises there is some margin loss and reduction in build

flexibility but it also highlights the de-risking that such a move brings. Within

these contracts the company has a maximum price. Within London Bellway

also uses its strong relationships with Housing Associations to sell part of its

private developments to the social providers at market value, further de-risking

the projects as well as creating a more efficient capital model.

Further growth targeted

Within London Bellway seeks a balanced exposure using approx 20% of group

capital employed. The company however sees its positioning as opportunistic;

willing to increase above this level should the opportunity arise. Bellway

believes its 5-10 year history in the London market provides it a competitive

advantage in its land buying. This reputation for delivery of product thecompany sees as differentiating it from the crowd.

Figure 72: Bellway London Key data


Central London completions Approx 150 2.2% na na

London Completions 865 15.3% 1120 18.0%

London ASP £240,539 1.24x £247,887 1.18x

London revenue 208.1 18.7% 277.6 20.0%

London EBIT 37.5 24.8% 55.5 22.8%

London EBIT margin 18.0% 1.32x 20.0% 1.19x Source: Deutsche Bank* implied

Rating

HoldEurope

United Kingdom

Housebuilders

UK Housebuilders

Company

Bellway

Targeting London on a de-risked basis

Glynis Johnson

Research Analyst

(+44) 20 754-74030

[email protected]


1,527.00

Price Target (GBP) 1,592.00

52-week range (GBP) 1,517.00 - 951.00


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Housebuilders



Model updated: 15 October 2013 Fiscal year end 31-Jul 2010 2011 2012 2013E 2014E 2015E

Sales revenue 768 886 1,004 1,111 1,336 1,460

Gross profit 91 121 164 206 267 312

EBITDA 53 77 116 154 204 246











Net profit 36 50 79 109 151 187


DB Net profit 36 50 79 109 151 187

Cash Flow (£m)Cash flow from operations 72 -47 -23 60 -51 72

Net Capex -1 -2 -4 0 -2 -2

Free cash flow 71 -49 -27 60 -53 70

Equity raised/(bought back) -1 0 1 2 0 0Dividends paid -11 -13 -18 -28 -37 -51

Net inc/(dec) in borrowings 44 0 -18 -32 0 0

Other investing/financing cash flows 0 0 0 1 0 0

Net cash flow 102 -62 -62 3 -90 19

Change in working capital 13 -111 -111 -60 -209 -122





Other assets 1,239 1,379 1,519 1,616 1,825 1,946

Total assets 1,392 1,471 1,552 1,652 1,842 1,967


Other liabilities 255 286 322 365 369 373

Total liabilities 358 398 419 434 509 498



Total shareholders' equity 1,035 1,073 1,133 1,219 1,333 1,470

Net debt -43 28 75 44 134 114

Key Company MetricsSales growth (%) 12.4 15.3 13.3 10.6 20.3 9.3

DB EPS growth (%) 67.8 40.0 57.6 36.2 39.2 23.8

EBITDA Margin (%) 6.9 8.7 11.6 13.8 15.3 16.9

EBIT Margin (%) 6.7 8.5 11.4 13.6 15.1 16.7

Payout ratio (%) 33.7 30.1 30.5 33.6 33.3 33.3

ROE (%) 3.6 4.8 7.2 9.2 11.8 13.3

Capex/sales (%) 0.2 0.3 0.5 0.2 0.1 0.1

Capex/depreciation (x) 1.1 1.5 2.5 0.8 0.8 0.8

Net debt/equity (%) -4.1 2.6 6.7 3.6 10.0 7.8




Europe DB EPS (GBp) 29.56 41.38 65.23 88.87 123.69 153.15



121 121 122 122

41.43 51.30

1096.76 1209.03

122

Average market cap (£m) 896 771 882 1,856 1,856 1,856


Bellway Enterprise value (£m) 853 799 957 1,900 1,990 1,971

Reuters: BWY.L Bloomberg: BWY LN Valuation MetricsP/E (DB) (x) 25.1 15.4 11.2 17.2 12.3 10.0



FCF Yield (%) 7.9 nm nm 3.2 nm 3.8

1.71


8.0

2.0 2.7 3.4


10.6 8.4

1.49 1.35

EV/EBITDA (x) 16.1 10.4 8.2 12.4 9.7

12.6 9.9 8.1


Company Profile


[email protected]

Bellway,founded in 1946and headquartered in Newcastle, is

a major housebuilder with a national presence known for its

focus on creat ing homes with a strong regional ident ity.

Bellway hasn't made any major acquisitions in its history andhas paid a dividend each year since its stock market listing.


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Housebuilders



Derisking its London operations

Targeting affordable London

Within London Bellway’s general remit is for developments aimed at

“affordable London”—the company sees this as an average selling price of

approx £250K. Feeling this to be a position in the market where there issignificant domestic demand and also undersupply, the company feels more

comfortable at £450-660 square foot (both in terms of demand/supply -but also

the specification required), with the £800-1000 per square foot (translating to

nearer to £950K for a home) the company seeing as having a limited customer

base. Within London Bellway has only a limited number of higher priced

developments (eg £800 sq ft at Chelsea Reach).

Seeking to balance margin with de-risking

While Bellway runs a fuller model in London than many of its peers, it still fully

contracts out build and project management in approximately a quarter of its

developments (particularly some of the more complex) where it prefers to have

a fixed price for the build. Where it main contracts Bellway recognizes there is

some margin loss and reduction in build flexibility but it also highlights the de-

risking that such a move brings (with a maximum price in each contract). The

company however does most of its selling in-house not only to capture the

margin on sale, but also in order to maintain the Bellway brand and ensure

customer care. Controlling selling the company believes allows it to control the

speed of selling and have better control of pricing.

Strong relationships with RSLs provide further de-risk opportunities.

Within its London operations Bellway views it has a strong relationship with its

RSLs and indeed on 3 sites with planning (Bermondsey, Kingsbury, Equinox 2

in Poplar) the company has contracts to sell the full private development to the

social providers at market value (eg In Bermondsey of 44 units 12 were social

but the RSL purchaser has contracted to buy the remaining 32 private units atmarket price (with stage payments). Where the proceeds from the social

provider are comparable to open market levels, the company sees these

agreements as derisking the projects and creating a more efficient capital

model.

Further growth targeted

Scope for a larger exposure based on opportunity

Bellway manages its London exposures through 4 divisions: Thames Gateway,

South East, North London and Essex and through these businesses the group

operates in the 25 boroughs within Mayor Boris Johnson’s remit. Within this

London region the company estimates it has approx 500 staff (although manyof these will have a remit outside London also) with these regions having

range of housing types from high rise apartments to houses. Bellway’s London

objectives are to have a balanced exposure to the region and while not looking

for a certain proportion of revenue from the region, the company targets

approx 20% of capital employed in the capital. The company however see this

as opportunistic, being willing to increase above this level should the

opportunity arise. With 2 of the divisions in the region currently doing 300

units per year, while Thames Gateway exceeds 700 units Bellway sees scope

to do up to 500-800 more units across London should it be able to roll out the

flatted model.



28 October 2013

Housebuilders



Land buying still offering opportunity

Land buying across the divisions for the group are assessed by the CEO and

FD of each division, with an over-view then provided by the Regional Chairman

and also at times the FD and the CEO (who was previously the Chairman of

South). Within the land market the company reports that it continues to be

able to purchase the land it requires at its hurdle rate in the past 6 months.

However the company does report that the London market is more

competitive in the past months with greater activity from Berkeley, Barratt,

Registered social landlords and private equity, Taylor Wimpey, Redrow, Crest

Nicholson. Within its portfolio Bellway has a variety of sites including high rise,

and it views that where the average selling price if £250K then the work in

progress (WIP) is digestible, at least as much as it is for a small site of higher

priced product.

Bellway’s reputation and experience provides competitive advantage

Bellway believes its 5-10 year history in the London market provides it with a

competitive advantage in its land buying – being one of the few not to pull out

through the downturn the company believes it has strong relationships with

vendors, local authorities and planners. This reputation for delivery of productthe company sees as differentiating it from the crowd. It also sees its balance

sheet as offering an advantage with the ability to buy outright rather than

require deferred terms, with its delivery of social early in the build being valued

by the local authorities.

Investment thesis for Bellway

Bellway growth strategy we believe should drive double digit EPS growth pa to

2016. With the stock trading in line with its mid cap peers and the lower end of

the sector range, the stock doesn't appear expensive. However with significant

land buying still required (albeit focused on smaller sites) we see more

established growth stories elsewhere in the sector. Hold

Figure 73: Bellway price target calculation

2016

NAV/share 1324

Intangible assets 0

NTAV/share 1324


Value of NTAV 2015 1722


Dividends 116

Price target 1592

discount rate 8.0% Source: Deutsche Bank

Risks

Upside/downside risks include: the higher/lower margins on the new land;

greater/lower levels of forward sales; higher/lower build costs; greater/lesser

government funding.



28 October 2013

Housebuilders



Figure 74: Completions and ASP of Bellway London

Completions 2014 2015 2016 ASP Status

Old Biscuit Factory Hither Green £175,000 Build complete

Normanton Heights Croydon 20 £230,000 Build complete

Queensgate Mews Putney 7 £1,200,000 Build complete

Heathside Bexley 14 £459,000 Build completeThe Mill Bexley 69 £264,110 Build complete

Chelsea Reach Fulham £800,000 Nearly completed

City East Barking 350 350 350 £200,000 In progress with showroom

Enfield Central Enfield 50 34 £330,000 In progress with showroom

Hanwell Locks Hanwell In progress with showroom

Fusion Wandsworth 56 £300,000 In progress with showroom

Langroyd Mews Wandsworth 134 £849,000 In progress with showroom

Mayfield Park Carshalton £200,000 In progress with showroom

Belvedere Park Belvedere In progress with showroom

New Festival Quarter Poplar 50 £300,000 In progress with showroom

So Stepney Stepney 118 £330,000 In progress with showroom

Kew Reach Brentford 46 £300,000 In progress, no showroomThe Mall Kingsbury 143 £300,000 In progress, no showroom

Nightingale Balham In progress, no showroom

Twist Bermondsey In progress, no showroom

Dunningford Chase Elm Park 50 58 £250,000 In progress, no showroom

Equinox Poplar 117 £300,000 In progress, no showroom

The Pavillions Tottenham 140 £250,000 In progress, no showroom

Chrisp Street Poplar In progress, no showroom

Hampton Grange Bromley In progress, no showroom

Pembury Circus Hackney 70 64 £300,000 In progress, no showroom

Pinnacle Square Bexleyheath 126 £250,000 In progress, no showroom

Chiswick Point Chiswick £410,000 Demolition

Lawrence Sq, West Green Haringey 100 110 £189,394 DemolitionFlow Balham Demolition

The Old Dairy Streatham Demolition

Listello Buildings Clapham Demolition

Love Lambeth Kennington 75 £190,000 Demolition

First Central Ph2 Park Royal Not started

Roding Lane Woodford Bridge Not started

Peninsula M0101 Greenwich Not started

High Road Leyton Not started

Salcombe Road Dalston Not started

Tunberry Quays Canary Wharf Not started

Total London completions 983 1120 598

As % of Bellway 15.2% 16.2% 8.1%Bellway completions 6,468 6,921 7,405 Source: Company data and Deutsche Bank

Figure 75: Bellway London ASP

2013 2014 2015 2016

Average London ASP £240,539 £325,376 £247,887 £226,087




28 October 2013

Housebuilders



Figure 76: Revenue from Bellway London revenues (£m)

Revenue 2014 2015 2016

Old Biscuit Factory Hither Green 0.0

Normanton Heights Croydon 4.6

Queensgate Mews Putney 8.4

Heathside Bexley 6.4The Mill Bexley 18.2

Chelsea Reach Fulham

City East Barking 70.0 70.0 70.0

Enfield Central Enfield 12.5 8.5

Hanwell Locks Hanwell

Fusion Wandsworth 16.8

Langroyd Mews Wandsworth 113.8

Mayfield Park Carshalton

Belvedere Park Belvedere

New Festival Quarter Poplar 15.0 0.0

So Stepney Stepney 38.9

Kew Reach Brentford 13.8The Mall Kingsbury 42.9

Nightingale Balham

Twist Bermondsey

Dunningford Chase Elm Park 12.5 14.5

Equinox Poplar 35.1 0.0

The Pavillions Tottenham 35.0

Chrisp Street Poplar

Hampton Grange Bromley

Pembury Circus Hackney 21.0 19.2

Pinnacle Square Bexleyheath 31.5

Chiswick Point Chiswick

Lawrence Sq, West Green Haringey 18.9 20.8Flow Balham

The Old Dairy Streatham

Listello Buildings Clapham

Love Lambeth Kennington 14.3

First Central Ph2 Park Royal

Roding Lane Woodford Bridge

Peninsula M0101 Greenwich

High Road Leyton

Salcombe Road Dalston

Tunberry Quays Canary Wharf

Total London 319.8 277.6 135.2

London relative to Bellway 23.9% 19.0% 8.4%Bellway revenue 1336.0 1460.2 1601.2 Source: Company data and Deutsche Bank



28 October 2013

Housebuilders



Reuters Bloomberg

RDW.L RDW LN

Targeting to reach 20-25% of group revenues pa from London

Redrow targets its London business to reach 20-25% of group revenues in the

coming years, and while completions are forecast to only reach 7.5% of group

by FY 15 the higher ASP on the sites suggests the company should be able toreach the at least 15% in the coming 2 years. With all the London land bought

since the downturn we believe Redrow’s London sites to be significantly more

profitable than the group as a whole. As such assuming the business achieves

its hurdle rate in the region (20%) then we believe this business should

contribute 15-20% of the profit to the Redrow group in the coming 2 years.

But a growing presence requires further building of the London land bank

Having re-entered the London market 3 years ago, Redrow has secured a

pipeline of sites to give a steady completion rate through FY 2014-16.

However with many of the develops expected to trade out in the coming 24

months we see the challenge for the group to be to secure the land bank for

future years. The company suggests it has significant land acquisitions in the

pipeline as well as looking to be opportunistic on smaller sites. However withthe company indicating that most sites have a lead time of approx 2 years

from acquisition before completions are seen then further site acquisition will

need to be announced in the coming 6-12 months in order to provide a

smooth progression for 2016 onwards.

Figure 77: Redrow London Key data


Est London Completions 13 0.4% 202 6%

Est London ASP £500,000 2.4x 679,950 2.7x

Est London revenue (£m) 6.5 0.8% 137.4 21%

Est London EBIT (£m)** 1.3 1.8% 27.4 17.1%

Est London EBIT margin) 20.0% 1.6x 20.0% 1.2x Source: Deutsche Bank, * Based on DB ests for group rather than the current London land bank of the group,

Rating

HoldEurope

United Kingdom

Housebuilders

UK Housebuilders

Company

Redrow

Growing presence in London

Glynis Johnson

Research Analyst

(+44) 20 754-74030

[email protected]

Price at 23 Oct 2013

(GBP)

257.1

Price Target (GBP) 278.00

52-week range (GBP) 255.10 - 152.90


80

120

160

200

240

280

10/11 4/12 10/12 4/13

Redrow



Absolute 9.1 0.2 57.7

FTSE 100 INDEX 0.1 0.1 11.3



Market cap (GBP)(m) 915.0


Free float (%) –


–




28 October 2013

Housebuilders



Model updated: 23 October 2013 Fiscal year end 30-Jun 2011 2012 2013 2014E 2015E 2016E

Sales revenue 453 479 605 786 899 893

Gross profit 66 84 115 164 201 211

EBITDA 33 49 73 114 156 265


Amortisation 0 0 0 0 0 0

EBIT 31 48 72 113 155 263









Net profit 14 30 54 81 116 201


DB Net profit 14 34 55 81 116 201

Cash Flow (£m)

Cash flow from operations -30 -21 -79 -106 30 158

Net Capex 5 12 8 -1 -1 -1

Free cash flow -25 -10 -71 -107 28 157

Equity raised/(bought back) 0 78 -5 0 0 0

Dividends paid 0 0 0 -4 -16 -23

Net inc/(dec) in borrowings 33 -55 65 0 0 0

Other investing/financing cash flows 0 -7 -1 0 0 0

Net cash flow 7 6 -12 -110 12 133

Change in working capital -66 -64 -144 -212 -100 -44

Balance Sheet (£m)

Cash and other liquid assets 32 37 39 39 39 39




Other assets 705 824 996 1,269 1,332 1,370

Total assets 752 875 1,048 1,321 1,384 1,422


Other liabilities 186 262 309 382 358 363

Total liabilities 293 314 439 622 586 458

Shareholders' equity 459 562 609 686 786 964


Total shareholders' equity 459 562 609 686 786 964

Net debt 75 14 91 201 189 56

Key Company Metrics

Sales growth (%) 14.1 5.8 26.3 30.0 14.3 -0.6

DB EPS growth (%) nm 143.5 40.4 46.9 43.4 73.3

EBITDA Margin (%) 7.2 10.3 12.1 14.5 17.4 29.6

EBIT Margin (%) 6.9 10.0 11.9 14.4 17.2 29.5

Payout ratio (%) 0.0 0.0 6.8 20.0 20.0 20.0

ROE (%) 3.0 5.9 9.2 12.5 15.8 23.0

Capex/sales (%) 0.2 0.1 0.1 0.2 0.1 0.1


Net debt/equity (%) 16.4 2.5 14.9 29.3 24.1 5.8




Europe DB EPS (GBp) 4.43 10.79 15.15 22.25 31.91 55.29



312 363 363 363

6.38 11.06

216.35 265.26

363

Average market cap (£m) 367 372 630 934 934 934


Redrow Enterprise value (£m) 443 386 721 1,136 1,123 990

Reuters: RDW.L Bloomberg: RDW LN Valuation MetricsP/E (DB) (x) 27.2 11.1 11.4 11.6 8.1 4.6



FCF Yield (%) nm nm nm nm 3.0 16.8

1.44


3.7

1.7 2.5 4.3


8.0 10.0

1.25 1.11

EV/EBITDA (x) 13.6 7.8 9.8 9.9 7.2

10.0 7.3 3.8


Company Profile

Market Cap £ 934m EV/EBIT (x) 14.2

[email protected]

Redrow, established in 1974 by current Chairman Steve

Morgan, operates across most parts of England and Wales.

Since his return Morgan has looked to re-focus the group

back on building traditional style houseswith the launch of its"The New Heritage Col lect ion" of family homes in 2010 as

well as developing a London franchise.


Margin Trends


Solvency

Glynis Johnson

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RDW.L F.T. INDEX 100 (Rebased)

0

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101520253035

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05101520253035

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28 October 2013

Housebuilders



London – a key growth focus

Targeting to reach 20-25% of group revenues pa from London

Redrow targets its London business to reach 20-25% of group revenues in the

coming years, and while completions are forecast to only reach 7.5% of group

the higher ASP on the sites on which they are trading suggests the companyshould be able to reach the at least 15% by 2015. With all the London land

bought since the downturn we believe Redrow’s London sites to be

significantly more profitable than the group as a whole. As such assuming the

business achieves its hurdle rate in the region (20%) then we believe this

business should contribute 15-20% of the profit to the Redrow group in the

coming 2 years.

Figure 78: Completions, revenues, ASP and EBIT from Redrow London

2014 2015

Total London completions 239 202

As % of Redrow 7.2% 5.7%

London average selling price 392,176 67,950Company guidance of London ASP 400,000 600,000

Total London revenue 93.7 137.4

Company guidance of London revenue 100 150

London revenue as % Redrow 11.9% 15.1%

EBIT assuming 20% margin 18.7 27.4

% Redrow Group EBIT 16.6% 17.7 Source: : Company data and Deutsche Bank

Movement to full development model could impact profits

Initial builds use main contractors to reduce risk and build company presence

Redrow’s initial developments in London have revolved around key sites inKingston and Aldgate with more speculative fill-ins such as Connaught Square

and Totteridge & Whetstone. To “hit the ground running” when it entered the

market the company adopted the procurement process previously in place at

the group from its “In The City” range. As such Redrow initially has managed

build using main contractors: the company sets out the design work and then

selects a contractor through a 2 stage process to ensure costs are kept under

control (fixed cost contracts with specification of build, time frame and costs

although with break clauses between phases).

Looking to develop more value added sites in the medium term

Going forward Redrow is looking to add value through planning and as such

will look to develop its portfolio of larger sites with the company focusing on

developments of 1000 units and upwards (GDV >£400m), with management

confident of running between 1-3 of these types of developments at any one

time. In doing this the company will look to change to a sub-contract model as

it will have scale and longevity in order to justify the employment of the

necessary personnel (although any fill-ins bought by the company likely to be

handled on a main contract basis unless it has spare project management

capacity). Within these developments Redrow would prefer to have a mix of

size (and price) of units in order to lessen any impact of over-supply should it

become an issue. However the company would not rule out doing a tower (ie

above 31 floors) were it to see an opportunity where the ROCE would meet its

hurdle rates.



28 October 2013

Housebuilders



But movement to full model could add costs before it shows profits

The movement to a full development model we believe could add significant

costs to the region, as the company takes some elements of build, planning

and sales in-house – driving the number of employees up from the current 25

people. Therefore while we believe that if this business is run correctly it will

allow the group to better access more sustainable margins this is a key stage

in its Redrow’s management of the business. The new Managing Director for

London, James Moody, previously at Crest Nicholson (Eastern) appointed on 1

Oct 2013 has a big task ahead.

More sites are required to sustain London contribution

Redrow sees the London market continuing to provide opportunity…

Redrow reports that the land market in London continues to offer opportunity,

seeing competition up on a few months ago, although significantly down on 6-

7 years ago. While it sees the market as competitive it views land buyers as

being “pretty sensible”. Sites with planning continue to be in strong demand

and for those it reports deferred terms for payment are more difficult to get to.

As such the company now is looking for more complex sites seeing those sites

as the ones where it has opportunity, giving examples of complex sites which

they already operate on such as Kingston where a large electricity substation

had to be overcome, the administrator in the case of Aldgate, and negotiations

with Bouygues in the case of Amberley.

..and it sees itself gaining presence

Within the London market Redrow believes that it is gaining presence, and

cites its inclusion on the Westminster Development Panel as evidence of this.

Management believe that land agents in the capital include Redrow on this list

of those to call for developments, and more and more recognise the

company’s ambitions to tackle more complex projects.

Further sites required in order to maintain London’s contribution at group level

Having re-entered the London market 3 years ago, Redrow has secured a

pipeline of sites to give a steady completion rate through FY 2014-16. However

with many of the develops expected to trade out in the coming 24 months we

see the challenge for the group to be to secure the land bank for future years.

The company suggests it has significant land acquisitions in the pipeline as

well as looking to be opportunistic on smaller sites. However with the

company indicating that most sites have a lead time of approx 2 years from

acquisition before completions are seen then further site acquisition will need

to be announced in the coming 6-12 months in order to provide a smooth

progression for 2016 onwards.

Investment in London driving net debt of the group

Reflecting the build out of its London assets as well as its strong land

acquisitions strategy elsewhere in the UK Redrow guides to net debt of £150m

at Dec 13 increasing to £200m at FY 14. Management then sees itself

maintaining net debt of £200m through to FY 15 before any reduction is seen.

The company guides that capital employed in London at YE 13 was approx

£160m, and that this is anticipated to rise to FY 15 before flattening off.



28 October 2013

Housebuilders



Investment thesis for Redrow

With its strategy of growth in site numbers, rejuvenation of land bank and

product range, Redrow ought to be able to show some of the most significant

EBIT growth in the sector in our forecast period. However while its re-entrance

into the London market contributes to a significant part of this growth in 2014the cash outs for land and work-in-progress required imply that cash outflows

will continue for at least another 2 years. Trading at 1.22x 2014 NTAV

Redrow's valuation appears mid-of-the-pack, a suitable valuation given the

earnings growth but more geared balance sheet. While through FY 13 a

reawakening of corporate activity talks is possible, we remain cautious of

playing the stock for this trigger. Hold.

Figure 79: Redrow price target calculation

2016

NAV/share 265

Intangible assets 1

NTAV/share 265Multiple of NTAV 1.25

Value of NTAV 331


Deferred tax asset

Pension -1

Dividends to that point 11

Price target 294

discount rate 8.0% Source: Deutsche Bank

Risks

Risks include the demand for its housing range, the group’s London ambitions,

the cost of land acquisitions and changes in build costs.



28 October 2013

Housebuilders



Figure 80: Completions from Redrow’s London operations

2014 2015 2016 ASP (Excl inflation)

Kingston Riverside 90 120 450,000

Kingston Riverwalk 31 50 450,000

One Commercial Street 100 37 400,000

Connaught Place 7 7,000,000Amberley Waterside 7 40 800,000

205 Holland Park 41 1,000,000

Northway House 149 250,000

Social 49 7 270,000

Total London completions 239 202 287 nm

As % of Redrow 7.2% 5.7% 7.5% nm Source: Company data and Deutsche Bank

Figure 81: Revenues from Redrow’s London operations (excl inflation)

2014 2015 2016

Kingston Riverside 40.5 54.0 The company reports that 1/3 of Kingston Riverside is now sold, with reservationsat approximately 1 per week. The company has opened a show apartment.

Kingston Riverwalk 14.0 22.5

One Commercial Street 40 1.8 75% sold, with good take-up overseas, with the more expensive apartmentsremaining yet to be sold.

Connaught Place 49 Launching this year and already seeing strong interest

Amberley Waterside 5.6 32.0 Launched in Singapore with over 50% reserved over just 1 weekend.

205 Holland Park 41.0 Launching in H2 13

Northway House 37.3 Planning submitted.

Social 13.2 1.9

Total London revenue 93.7 137.4 134.6

London revenue as % Redrow 11.95 15.3% 15.1% Source: : Company data and Deutsche Bank



28 October 2013

Housebuilders



Reuters Bloomberg

TW.L TW/ LN

Building position in London

TW is looking to grow its Central London operations to 300-350 units in FY 15

(approx 3% of group completions). Our forecasts show this to be achievable

and with an average selling price in this London business of 3x group average

and a strong EBIT margin reflecting that its developments have been boughtsince the downturn we believe Central London could constitute approx 14% of

group EBIT by 2015. This growth in central London we believe is already

largely reflected in our TW forecasts and we have only made very minor

changes to our earnings ests to reflect a slightly larger contribution from its

London joint ventures.

Smaller site size implies more limited visibility post 2015

Within Central London Taylor Wimpey’s focus on sites of approx 30-60 has led

to a strong looking pipeline of sites to 2015. However by nature of their size of

sites there is less visibility for completions for 2016 and beyond.

We are more wary of the sustainability of returns on pure developers model

TW’s Central London operations run a pure development model using a maincontractor for build, de-risking the project with agreed build costs and time

scale usually in the contract. This we see as be generating strong margins at

this time. However with the London market becoming more competitive

especially for the more straightforward smaller sites we believe differentiating

on balance sheet alone may not be enough to secure new land deals at these

margins in the future. At this time TW management reports that it is starting to

gain traction on the land market, with management reporting that direct

funding, quick time frames and ability to carry through seen as differentiating

factors. The group’s nation-wide reputation and also the economies of scale in

material purchase may also help. However with an efficient capital model for

the land market in London we question whether the high margins currently

being achieved are sustainable and our forecasts include a decline in EBIT

margins although at 20% still remaining above group average.

Figure 82: Taylor Wimpey London Key data

2013 % group 2015E % group

Central London completions 160 1.4% 390 2.9%

London Completions 1000 8.6% na na

Central London ASP £517,634 2.75x £623,590 3.11x

Central London revenue (£m) 82.8 3.7% 243.2 9%

Central London EBIT incl associates (£m) 20.7 6.8% 60.4 13.5%

Central London margin 25.0% 1.83 20% 1.25x Source: Company data and Deutsche Bank* implied

Rating

BuyEurope

United Kingdom

Housebuilders

UK Housebuilders

Company

Taylor Wimpey

London: becoming increasinglyimportant but question of sustainability

Glynis Johnson

Research Analyst

(+44) 20 754-74030

[email protected]


113.9

Price Target (GBP) 140.0052-week range (GBP) 113.80 - 56.65


20

40

60

80

100

120

10/11 4/12 10/12 4/13

Taylor Wimpey



Absolute 11.7 4.8 89.5FTSE 100 INDEX 1.0 -0.2 11.9




Shares outstanding (m) 3,262

Free float (%) –


803,783


Implied & Realized Volatility (3M)

0%

50%

100%

150%

200%

250%

Jul 08 Jan 09 Jul 09 Jan 10

Realized Vol Implied Vol (ATM)


Implied Volatility (3M, ATM) vs. Peers

68.1%

51.0%

36.0%

27.6%

27.1%

TOM2.AS

TW.L

BULG.MI

PSN.L

*STOXX 600

*Weighted-avg. of index components*Data as of 23-Dec-09




28 October 2013

Housebuilders



M odel updated: 24 October 2013 Fiscal year end 31-Dec 2010 2011 2012 2013E 2014E 2015E

Sales revenue 2,603 1,808 2,019 2,231 2,595 2,776

Gross profit 368 289 358 452 542 629

EBITDA 126 154 230 341 368 443


Am ortisa tio n 0 0 0 0 0 0

EBIT 121 153 228 339 366 441


As so ciates/a ffiliat es 10 1 2 0 6 6

Exceptionals/extraordinaries -83 -6 22 0 0 0


Profit befo re tax -71 79 208 292 344 419

Income tax expense -331 23 -24 67 89 95

M inorities 0 0 0 0 0 0


Net pro fit 259 99 231 247 255 324

DB adjustments (including dilution) -303 4 -82 9 8 5

DB Net pro fit -43 103 149 256 263 329

Cash Flow (£m)

Cash flow from operations 88 -35 78 33 61 154

Net Capex -5 557 -4 -4 -4 -4

Free cash flow 83 523 75 29 56 149

Equity raised/(bought back) 0 -8 -4 0 0 0

Dividends paid 17 11 -18 -20 -171 -46

Net inc/(dec) in borrowings -49 -573 -15 9 -109 110

Other investing/financing cash flows -4 9 3 0 6 6

Net cash flow 47 -39 41 19 -218 220

Change in working capital 99 -144 -126 -193 -191 -166

Balance Sheet (£m)

Cash and o ther liquid assets 184 148 190 200 91 201



As so ciates/invest ment s 0 0 0 0 0 0

Other assets 4,130 3,215 3,348 3,483 3,616 3,733

Total assets 4,325 3,373 3,550 3,697 3,724 3,952


Other liabilities 1,664 1,273 1,311 1,253 1,196 1,146

Total liabilities 2,502 1,538 1,561 1,503 1,446 1,396


M inorities 2 2 1 1 1 1

Total shareho lders' equity 1,823 1,835 1,990 2,194 2,278 2,557

Net debt 655 117 59 50 159 49

Key Company Metrics

Sales growth (%) 0.3 -30.5 11.7 10.5 16.3 7.0

DB EPS growth (%) 95.2 nm 45.8 71.6 2.8 24.8

EBITDA M argin (%) 4.8 8.5 11.4 15.3 14.2 16.0

EBIT M argin (%) 4.7 8.4 11.3 15.2 14.1 15.9

Payout ratio (%) 0.0 12.2 8.5 69.3 17.8 65.0

ROE (%) 15.6 5.4 12.1 11.8 11.4 13.4

Capex/sales (%) 0.2 0.3 0.2 0.2 0.2 0.2


Net debt/equity (%) 35.9 6.4 3.0 2.3 7.0 1.9


Source: Company data, Deutsche B ank estimates

5.8

0.64

EV/EBITDA (x) 13.4 8.3 7.3 10.8 10.3

0.71

1.2 1.3

3,6291,618

4.6 0.8 1.6

4.71.0

EV/Sales (x)

Taylo r Wimpey plc is a dedicated homebuilding

companywith operat ions in the UK, North America,

Spain and Gibral tar. UK homes are sold under the

brands George Wimpey, Bryant Homes, G2, WilsonConnollyand LaingHo mes.The groupbuilds a range

of product s, f rom one bedroom apar tments and

starter homes to large detached family homes. In

Nort h Amer ica, t he homes opera te under Taylor

Woodrow (Arizona, Florida, Texas, and California),

M orrison Homes and Mo narch (Ontario & Toronto ).

Company Prof i le

GBp 140.00Target price

52-w eek Rang

Dividend Yield (%)

GBp 56.65 – 113.90

0.0

UK Housebuilders

Reuters: TW.L Bloomberg: TW/ LN

BVP S (GBp)

Taylor Wimpey Plc

Weighted average shares (m)

Av erage market cap (£m)

Enterprise value (£m)

Valuation Metrics

4.1

15.0

P/E (DB ) (x)

12.1

FCF Yield (%)

4.1

8.2

P/ E (Reported) (x)

P/B V (x)

11.5

Price (23 Oct 13) GBp 113.90

14.1

0.65

45.0

1.05 1.65

7.2Buy

Running the Numbers

7.83

1.421.590.55

57.47

1,161

3,194

1,020

DB EPS (GBp)

Reported EPS (GBp)Europe

UK DPS (GBp)

Financial Summary-1.31 3.14 4.58 7.85 8.07 10.08

7.58 9.92

11.314.5

3,789 3,679

3,629

5.38 1.43 6.60

7.86 3.02

11.1

7.09

nm 11.6

57.04

0.620.00

1,676

3,186 3,186

14.6

3,629

1,280 1,678 3,680

3,1863,190 3,186

62.39 68.82

0.38

80.1971.46

8.3

1.331.460.83 1.65

8.3

7.4 10.9 10.3EV/EBIT (x)

Income Statement (£m)

13.8 8.4£ 3,629mMarket Cap

US$ 5,868m

[email protected]

Glynis Johnson

1yr Price Perf ormanc e

M argin Trends


Solvency

000204060810121416


TW.L F.T. INDEX 10 0 (Rebas ed)

02468

1012141618

10 11 12 13E 14E 15E

EBITDA M arg in EBIT M argin

024681012141618

40

30

20

10

0

10

20

10 11 12 13E 14E 15E

Sale s gro wth (LHS) ROE (RHS)

0

5

10

15

20

050505050

10 11 12 13E 14E 15E

Net d ebt/e qui ty (LHS) Ne t inte res t c ov er (RHS)



28 October 2013

Housebuilders



Central London to reach 14% group EBIT by 2015

Central London volumes is forecast to double in size

TW is looking to grow its Central London operations from 160-180 completions

in 2013 to 180-220 in FY 14 and 300-350 units in FY 15; while looking for a

more consistent delivery from its other divisions which sit at least in part inLondon (which has traditionally seen a number of larger projects which have

proved lumpy – East London division including University of London,

Haggerston (Hackney), the Olympics village, Dalston, Hackney; Bornhamwood

(N Thames) etc). The company reports approx 31 outlets in its land bank.

Central London is forecast to grow to near 10% of group revenues by 2015

This growth in Central London we believe to be possible and with the average

selling price of Central London estimated to be 3x group we believe the

company ought to see a stronger contribution of London to revenues (rising to

9% in 2015). Taylor Wimpey doesn’t report profitability of its London

operations, however we believe that the group is making 20-25% EBIT margin

in the region (given its admin costs are minimal). On this basis we believe that

in the coming 2 years this business should drive up to 14% of group EBIT. This

growth in central London we believe is already largely reflected in our TW

forecasts. Excluding the contribution of this strong growth in profits from the

region, our forecasts already include strong margin progression of 200bps for

the remainder of the UK.

Figure 83: Taylor Wimpey Central London

2014E 2015E

Central London completions 263 390

As % of TW 2.8% 4.0%

Central London ASP £540,720 £623,590

Central London ASP relative to TW 145% 189%

Central London Revenues 172.2 243.2

As % of TW 6.6% 9

Central London EBIT incl assocaites 39.2 60.4

As % of TW 10.6% 13.5%

Central London margin 25% 20% Source: Company data and Deutsche Bank

Figure 84: Taylor Wimpey outside Central London

2014E 2015E

Revenues outside Central London 2418.8 2512.8

As % of TW 93.4% 90.5%

EBIT outside Central London 284.5 386.5

EBIT Margin outside Central London 13.2% 15.2% Source: Deutsche Bank

Need further acquisitions to build consistent business

Smaller site size implies more limited visibility post 2015

Within Central London Taylor Wimpey has focused on sites between 30 and

60, leading to a pipeline of sites which looks strong to 2015. However by

nature of its smaller sites there is reduced transparency for 2016 and beyond;

at this time our forecasts include just Waterside Park and Great Peter Street,

and its joint venture with Barratt at Greenwich Millenium Village.



28 October 2013

Housebuilders



Figure 85: Taylor Wimpey Central London 2016E

Completions 2016E

Waterside Park, Royal Docks, SE 16 156

73 Great Peter Street 30

Total consolidated 186

Joint venturesGreenwich Millennium Village 100

Central London completions incl jv 286

As % of TW 2.0%

Central London ASP £352,448

Central London Revenues 69.0

As % of TW 2.4%

Central London EBIT @20% EBIT 15.8

As % of TW 3.0% Source: Company data and Deutsche Bank

Still opportunities for land acquisition in Central London

Across its London business including Central London Taylor Wimpey reports a

hurdle rate which is in line with the rest of group operations (ie 20% ROCE) but

the company highlights that the hurdle rate used depends on the build (and its

complexity and timescale), sales and planning risk. However based on this

hurdle rate the company argues that there remains enough opportunity in the

sector for it to be prudent in its location section. Management now believing

that it is starting to gain traction, reporting that direct funding, quick time

frames and ability to carry through as differentiating factors (citing Fetters

Lane as an example of this)). Management reports its operations in outer

London and the rest of the UK lends an element of strength. Within central

London the company is content to focus on sites of approx 50-60 units with a

range of projects undertaken in order to spread the risk across a number of

outlets.

Sufficient land availability to achieve margins in Central London

For London as a whole TW does not analyse total demand/supply, instead

choosing to assess only on a local basis. The company states that in East

London where it sees supply being the greatest it sees it as harder to push

prices although it doesn’t attribute this to excess supply but more to down-

valuations (in these regions the company takes a higher selling rate due to its

inability to push prices). However it does recognize that in Central London it

has sites where there is more limited supply which it benefits from. Within the

London market Taylor Wimpey aims at a mid range of selling price – avoiding

above £2000 square foot - with the lower end being £600 square foot. In its

site selection the company reports that it doesn’t rely on overseas buyers for

its volumes, seeing domestic demand as key. However the group reports thatit has managed to sell overseas on all its schemes (equating to approx 33-50%

of London sites being sold in advance in many cases overseas).

Questions on pure development model

Central London run on a pure developer model

The TW central London operations run on a lean structure with approx 23

people employed in the division, with this business (but not the 5 other regions

which operate in London) operating with a main contractor model, de-risking

the project with agreed build costs and time scale usually in the contract. This

the company sees as the strategy in the foreseeable future also (while outside



28 October 2013

Housebuilders



of central London including the larger projects in East London the company

operates a sub-contractor model in which TW manages the build). In Central

London the company also uses external consultants for planning and agents

for sales (with most viewing requiring an appointment).

But greater competition in uncomplex sites may impact future margins

At this time we recognise that the pure development model is generating

strong margins (ahead of those operating full models). However with the

London market becoming more competitive especially for the more

straightforward smaller sites we believe differentiating on balance sheet alone

may not be enough to either secure land or to assure margins. At this time TW

management reports that it is starting to gain traction on the land market, with

management reporting that direct funding, quick time frames and ability to

carry through seen as differentiating factors. The group’s nation-wide

reputation and also the economies of scale in material purchase may also help.

However with an efficient capital model for the land market in London we have

to question whether the high margins currently being achieved are sustainable.

Investment thesis for Taylor Wimpey

Over the coming 12-24 months our forecasts reflect a strong improvement in

ROCE at TW driven by the increasing contribution of higher value new land,

and the improving trading environment aided by Help to Buy. Add to this a

cash return which ought to see greater focus through YE 13, we see further

upside in the stock--Buy. Our target price is set at 1.4x NTAV 2021E

discounted back at 8% with the discounted value of the dividends added to

this.

Figure 86: Taylor Wimpey price target calculation

Discounted Adjusted P/NTAV 2016

NAV/share 86

Intangible assets 0

NTAV/share 86


Value of NTAV 120


Pension -1.3

Dividend to that point 12.4

Price target 140.0

discount rate 8.0%


Risks

Risks include the profitability and timing of new land purchases as well as cash

payments to shareholders.



28 October 2013

Housebuilders



Figure 87: Taylor Wimpey London sites

Consolidated sites Division

St Dunstan’s Court, Fetter Lane, Central 76 in total, , land cost £30m

Regent Canalside, 31-39 Camden Road, NW1 9LR Central 52 apartments and 2 townhouses, ASP £827/sq ft. 55% sold

Mulberry Mews, Islington, N5 2EA Central 38 apartments and 7 townhouses, 90% sold, ASP £822/sq ft

The Junction, Tuffnell Park Central 25 homes, ASP £607/sq ft, on approx 22.5K square ft. Sold OutWaterside Park, Royal Docks, SE 16 (JV Collaboration) Central , ASP £445/sq ft, 156 in block D, 780 homes in total

Argyll Place, North Kensington Central 16 homes

73 Great Peter Street, Westminster Central 55 units, New build, planning granted

The Ladbroke Grove Central 135 units (or 145) partnership with workspace

The Mill West Hampstead Central ASP £691/sq ft, 39 apartments. Sold out

Scholars Court, Anerley, South London South East 56 homes in last phase

Sandringham, Eastcote, NW Surburbs (2 sites) West London 23 4-5 bed houses

Garratt Lane, Wandsworth South West Thames 24 apartments, this development is no longer active

Plaza 2, Surbiton South West Thames

Devonshire Place, Balham , SW12 9RB South West Thames 45 apartments, 27 homes

Radius, 3-4 Osiers Road, Wandsworth , SW18 1NL South West Thames

Grand Union Village (GUV) phase 12 & phase 4 - Northolt, North Thames 700 homes in 12 phases, Not many leftScenix, 84 Chigwell Road, South Woodford, E18 1NN East London 68 units, 5 storey

Haggerston West and Kingsland Regeneration East London 761 homes - completion 2014

Reflections Romford East London

Iconia, Bromley - Conquest House East London

Joint ventures

Kings Quarter, Chislehurst (jv with L&Q) South West Thames Final stage

Millbrook, Mill Hill (JV with Countryside and Linden) North Thames TW buildilng 58 3-4 bed homes

Academy Central, Barking & Dagenham (Part’ship L&Q) East London 11 Blocks 948 homes including 365 social, £6m section 106

Greenwich Millennium Village (JV Countryside) Central 1095 homes in phase I and II and 1746 in Phase III-V, Private876 in phase I and II, 1397 in Phase III-V (completion due 2032)


Figure 88: Taylor Wimpey estimated timing of completions in Central London

2014E 2015E 2016E

St Dunstan’s Court, Fetter Lane, 76

Regent Canalside, 31-39 Camden Road, NW1 9LR 52

Mulberry Mews, Islington, N5 2EA 45

Waterside Park, Royal Docks, SE 16 150 156 156

Argyll Place, North Kensington 16

73 Great Peter Street, Westminster 25 30

The Ladbroke Grove 133

Total consolidated 263 390 186

As % of TW 2.0% 2.9% 1.3%

Greenwich Millennium Village ,Greenwich (JV) 100 100 100

Millbrook, Mill Hill (JV) 58

Total London completions incl jv 363 548 286

As % of TW 2.8% 4.0% 2.1%

Completions targeted including jv 180-220 300-350 na Source: Company data and Deutsche Bank



28 October 2013

Housebuilders



Figure 89: Taylor Wimpey Central London average selling price

2014E 2015E 2016E

St Dunstan’s Court, Fetter Lane, £921,053

Regent Canalside, 31-39 Camden Road, NW1 9LR £620,250

Mulberry Mews, Islington, N5 2EA £483,336

Waterside Park, Royal Docks, SE 16 £300,000 £300,000 £300,000Argyll Place, North Kensington £2,500,000 £2,500,000 £2,500,000

The Mill West Hampstead £501,865 £501,865 £501,865

73 Great Peter Street, Westminster £800,000 £800,000

The Ladbroke Grove £800,000

Greenwich Millennium Village ,Greenwich £300,000 £300,000

Millbrook, Mill Hill £500,000 £500,000 £500,000

Total London ASP £474,406 £551,460 £352,448

London ASP relative to group 2.52 2.79 1.76 Source: Company data and Deutsche Bank

Figure 90: Taylor Wimpey Central London revenue2014E 2015E 2016E

St Dunstan’s Court, Fetter Lane, 70.0

Regent Canalside, 31-39 Camden Road, NW1 9LR 32.3

Mulberry Mews, Islington, N5 2EA 25.0

Waterside Park, Royal Docks, SE 16 45.0 45.0 45.0

Argyll Place, North Kensington 40.0

73 Great Peter Street, Westminster 20.0 24.0

The Ladbroke Grove 106.4 0.0

Total consolidated 142.2 243.2 70.8

As % of TW 5.5% 8.8% 2.5%

Joint ventures

Millbrook, Mill Hill 29.0Greenwich Millennium Village ,Greenwich 10.0 10.0 10.0

Total London Revenues 172.2 302.2 100.8

As % of TW 6.6% 10.9% 3.5% Source: Company data and Deutsche Bank



28 October 2013

Housebuilders



Crest Nicholson London

Figure 91: Crest Nicholson London Key data

2014 % group 2016 % groupCentral London completions **116 na 200 na

London Completions **116 na 200 na

London ASP **£680,000 na 500000 na

London revenue (£m) **80.0 *16.3% 100 *15% Source: Deutsche Bank* Compared to Reuters consensus, ** targeted by group

From opening an office to serve the London market in July 2011, in FY 13

Crest Nicholson reported 154 units making an average selling price of

£520,000, making approx £80m of revenue, and in FY 14 the group anticipates

similar with 116 completions at £680,000 average selling price. The company

targets 200 units making a revenue of approx £100m in Central London by

2015 (ie an implied average selling price of £500,000). While management

looks for Crest London to be important it does not want to be over-exposed inthe region.

Crest Nicholson describes London as the City of London and the Boroughs that

wrap them (ie Zone 1 and the better Zone 2). Within its developments Crest

Nicholson currently does not sell overseas, instead purchasers are from the

domestic market (excluding 1 on its Ixia development). In this market the

company believes it operates with a full team of 24 people covering

development/land, technical, construction and build and sales and marketing.

Given its size Crest Nicholson reports that it uses its employees for design,

sustainability and quality. However the company also employees its own

project managers and sub-contract out development.

In order to achieve £1000m revenues from the region, Crest Nicholson believes

it needs to purchase 4 sites per year or approx 50-60 units and has all the landin place for FY 14, 60% for FY 15, and 25% for FY 16. It targets these sites in

order to make its profit turn on the sites within a 2 year period, although the

company appears willing to look at somewhat larger sites. In buying this land

management reports that it has peak funds of approx £70m, with an asset turn

of approx 1.1-1.2x (seeking to sell everything off plan). For sites where a joint

venture partner may bring opportunity – in terms of access to land, access to

capital, access to customers – Crest may also consider joint ventures

At its land acquisitions the company is targeting margins similar to those

across the remainder of the country - gross margin of 25% and ROCE of 20%

(the latter being the primary focus). In its selling Crest Nicholson strategy

ought to more capture any inflation, with the development not launched until

the market suit is open.

Figure 92: Crest Nicholson developments

Development details

Bloomsbury Gardens, Bloomsbury

Resonate, Stockwell

Shaftsbury Gate (elsley Rd), Battersea 42 units, Planning March 2012

St Peters Place, Hammersmith £900-1000 square foot

Ixia, CIty of London, Shoreditch 48 apartments

Greenwich Peninsula, Greenwich Jv with Meridan Delta ltd (Lend Lease and Quintain),295 units, 5000 ft retail. Work start June 2008?

The Pavilions 2 Hale Jv with Bellway, Crest have Pavillions 2 Source: Deutsche Bank



28 October 2013

Housebuilders



Appendix A

The process of buying a home in London

Off plan reservations are the norm in London. Within the London market off

plan sales are often seen on new build. Usually for a reservation a nominal fee

is taken (usually not more than a few thousand pounds). This is then followed

up by a 10% deposit within a one month time frame with a further 5-15% due

usually another 6 months later. Sales on new build homes can be seen up to 3-

4 years in advance of expected completion (which compares to the 16-20

weeks usually seen in the rest of the UK).

Figure 93: Breakdown of home prices for first time buyers

who took out mortgages

Figure 94: Breakdown of home prices for home movers

who took out mortgages

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010 2011 2012

under £125K £125K- £175K £175K- £250K

£250- £500K over £500K

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008 2009 2010 2011 2012

under £125K £125K- £175K £175K- £250K

£250- £500K over £500K Source: CML Source: CML



28 October 2013

Housebuilders



Figure 95: Geographical breakdown of the London market

Inner London Outer London Central (Savills) Super Prime (Savills) Prime (Knight Frank)

Camden Barking and Dagenham Camden SW1

City of London Barnet City of London SW3 Belgravia

Hackney Bexley Kensington and Chelsea SW7 Chelsea

Hammersmith and Fulham Brent Westminster W1 MayfairHaringey Bromley W8 South bank

Islington Croydon W11 The City and City Fringe

Kensington and Chelsea Ealing NW* Knightsbridge

Lambeth Enfield NW1

Lewisham Greenwich N6

Newham Harrow SW10

Southwark Havering N2

Tower Hamlets Hillingdon N2

Wandsworth Hounslow SW19

Westminster Kingston upon Thames

Merton

RedbridgeRichmond upon Thames

Sutton

Waltham Forest Source: CLG and Savills, Kinght Frank



28 October 2013

Housebuilders



Appendix 1

Important DisclosuresAdditional information available upon request

Disclosure checklist

Company Ticker Recent price* Disclosure

Barratt Developments BDEV.L 340.97 (GBp) 24 Oct 13 3,6

Berkeley Group Hldgs BKGH.L 24.42 (GBP) 24 Oct 13 6

Bellway BWY.L 1,534.00 (GBp) 24 Oct 13 NA

Redrow RDW.L 253.31 (GBp) 24 Oct 13 NA

Taylor Wimpey TW.L 113.50 (GBp) 24 Oct 13 6,7,14*Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States.See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of thiscompany calculated under computational methods required by US law.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investmentbanking or financial advisory services within the past year.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this companywithin the past year.

Important Disclosures Required by Non-U.S. Regulators

Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.

3. Deutsche Bank and/or its affiliate(s) acts as a corporate broker or sponsor to this company.

6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of thiscompany calculated under computational methods required by US law.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investmentbanking or financial advisory services within the past year.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of thisresearch, please see the most recently published company report or visit our global disclosure look-up page on our

website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about thesubject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receiveany compensation for providing a specific recommendation or view in this report. Glynis Johnson



28 October 2013

Housebuilders



Historical recommendations and target price: Barratt Developments (BDEV.L)(as of 10/24/2013)

12

34

5

67

8

910

1112

13

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13

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Previous Recommendations

Strong BuyBuyMarket PerformUnderperformNot RatedSuspended Rating

Current Recommendations

BuyHoldSellNot RatedSuspended Rating

*New Recommendation Structureas of September 9,2002

1. 22/02/2012: Buy, Target Price Change GBP153.00 8. 21/03/2013: Buy, Target Price Change GBP323.00






7. 16/01/2013: Buy, Target Price Change GBP279.00

Historical recommendations and target price: Berkeley Group Hldgs (BKGH.L)(as of 10/24/2013)

12

3

45

6 7

89

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00


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1. 04/12/2011: Hold, Target Price Change GBP1,419.00 6. 10/12/2012: Buy, Target Price Change GBP1,925.00

2. 13/03/2012: Hold, Target Price Change GBP1,394.00 7. 08/01/2013: Buy, Target Price Change GBP1,941.00

3. 31/05/2012: Upgrade to Buy, Target Price Change GBP1,561.00 8. 21/03/2013: Downgrade to Hold, Target Price Change GBP2,211.00

4. 02/07/2012: Buy, Target Price Change GBP1,572.00 9. 19/06/2013: Hold, Target Price Change GBP2,252.00

5. 13/09/2012: Buy, Target Price Change GBP1,764.00



28 October 2013

Housebuilders



Historical recommendations and target price: Bellway (BWY.L)(as of 10/24/2013)

12 3

4

5 67

8

910

1112 1314

0.00

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

1,600.00


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1. 07/02/2012: Hold, Target Price Change GBP812.00 8. 07/02/2013: Hold, Target Price Change GBP1,188.00






7. 08/01/2013: Hold, Target Price Change GBP1,186.00 14. 15/10/2013: Hold, Target Price Change GBP1,592.00



28 October 2013

Housebuilders



Historical recommendations and target price: Redrow (RDW.L)(as of 10/24/2013)

1 2

34

5

67

8

91011

0.00

50.00

100.00

150.00

200.00

250.00

300.00


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1. 24/02/2012: Hold, Target Price Change GBP140.00 7. 24/04/2013: Hold, Target Price Change GBP220.00





6. 21/03/2013: Hold, Target Price Change GBP217.00



28 October 2013

Housebuilders



Historical recommendations and target price: Taylor Wimpey (TW.L)(as of 10/24/2013)

12

34 5 6

78

9

1011

12

1314

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00


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Equity rating key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of totalshare-holder return (TSR = percentage change inshare price from current price to projected target priceplus pro-jected dividend yield ) , we recommend thatinvestors buy the stock.Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell thestockHold: We take a neutral view on the stock 12-monthsout and, based on this time horizon, do notrecommend either a Buy or Sell.Notes:

1. Newly issued research recommendations andtarget prices always supersede previously publishedresearch.2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends)of 10% or more over a 12-month periodHold: Expected total return (includingdividends) between -10% and 10% over a 12-month periodSell: Expected total return (including dividends)of -10% or worse over a 12-month period

4 0 %

5 2 %

8 %

4 8 %

3 6 %

4 0 %

0

50

100

150

200

250

300

350

Buy Hold Sell

European Universe

Companies Covered Cos. w/ Banking Relationship



28 October 2013

Housebuilders



Regulatory Disclosures

1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the

"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are

consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the

SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures

Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the

meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively.

Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and

its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is

indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where

at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in thepreparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for

its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483.

EU countries: Disclosures relating to our obligations under MiFiD can be found at

http://www.globalmarkets.db.com/riskdisclosures.

Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc.

Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau

(Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures

Association of Japan, Japan Investment Advisers Association. Commissions and risks involved in stock transactions - for

stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the

commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations

and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange

fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit ratingagencies in Japan unless “Japan” or "Nippon" is specifically designated in the name of the entity. Reports on Japanese

listed companies not written by analysts of Deutsche Securities Inc. (DSI) are written by Deutsche Bank Group's analysts

with the coverage companies specified by DSI.

Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute,

any appraisal or evaluation activity requiring a license in the Russian Federation.



David Folkerts-LandauGroup Chief Economist

Member of the Global Executive Committee

Guy Ashton

Global Chief Operating Officer

Research

Marcel Cassard

Global Head

FICC Research & Global Macro Economics

Richard Smith and Steve Pollard

Co-Global Heads

Equity Research

Michael Spencer

Regional Head

Asia Pacific Research

Ralf Hoffman

Regional Head

Deutsche Bank Research, Germany

Andreas Neubauer

Regional Head

Equity Research, Germany

Steve Pollard

Regional Head

Americas Research

International locations

Deutsche Bank AG

Deutsche Bank Place

Level 16

Corner of Hunter & Phillip Streets

Sydney, NSW 2000

Australia

Tel: (61) 2 8258 1234

Deutsche Bank AG

Große Gallusstraße 10-14

60272 Frankfurt am Main

Germany

Tel: (49) 69 910 00

Deutsche Bank AG

Filiale Hongkong

International Commerce Centre,

1 Austin Road West,Kowloon,

Hong Kong

Tel: (852) 2203 8888

Deutsche Securities Inc.

2-11-1 Nagatacho

Sanno Park Tower

Chiyoda-ku, Tokyo 100-6171

Japan

Tel: (81) 3 5156 6770

Deutsche Bank AG London1 Great Winchester Street

London EC2N 2EQ

United Kingdom

Tel: (44) 20 7545 8000

Deutsche Bank Securities Inc.60 Wall Street

New York, NY 10005

United States of America

Tel: (1) 212 250 2500

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The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public

sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy o r completeness of such information.

Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including

strategists and sales staff, may take a view that is inconsistent with that taken in this research report.

Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change

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offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement.

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to value the security; as a result, the recommendations may differ and the price targets and estimates of each may vary widely.

In August 2009 Deutsche Bank instituted a new policy whereby analysts may choose not to set or maintain a target price of certain issuers under coverage with a Hold rating In particular this will typically occur for

Documents

DB_London housing market.pdf