More money to be made from land than building houses

“Analysts at Liberum believe both Redrow and Galliford could both pay up a little more for Bovis, but added that they may choose not to as they “earn better returns from buying open market land” …

… The analysts pointed out: “Both Redrow and Galliford Try have cited economies of scale. Merging with Redrow would create a 9,000 unit a year builder, and with Galliford a 7,000 unit a year builder (ex regeneration), meaning that the enlarged entity would be the fourth or fifth biggest builder by volumes.”

However, they added: “The merger wave of the 2000s was driven in part because builders with more scale got better terms for materials, but we wonder if this is still true as manufacturers are more consolidated and tend to have limited spare capacity – making incremental volumes less valuable to them.”

Noughties gone …

Back in the noughties tight planning and excess competition meant that land was scarce and land price inflation was running much faster than house price inflation.

It made sense then to buy large chunks of land through acquisition rather than buy it expensively on the open market.

However, the Liberum analysts noted that the land market is now benign with Steve Morgan, the boss of Redrow “himself observing that the land market is now the best it has been in 40 years.”

Therefore, a fresh wave of consolidation in the sector would probably look to be unlikely, particularly given the uncertainties opened up for the housing market by last June’s Brexit vote, with the moves for Bovis a special case.”