Fletcher Building puts some developments on hold in face of slowing housing market

Wednesday, 15 February 2023

The building supplies and construction company says it has paused some developments as the housing market slows.

Fletcher Building is “pragmatically pausing” some of its residential developments as the housing market slows.

“After two years of very strong growth, New Zealand house sales were softer, as expected,” chief executive Ross Taylor told reporters following the company’s first-half profit result on Wednesday.

House prices were down 10% to 15% from their peak in late 2021, and margins were returning to more normal levels, he said.

The company’s residential and development business, which is focused on large scale urban developments in Auckland and Christchurch, reported a 56% drop in pre-tax profit to $49 million in the six months to the end of December, while its operating profit margin slid to 22.4% from 35.2%.

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The company sold 189 residential units in the first half, down from 278 units in the same period last year, as rising interest rates slowed the property market and profit margins were impacted by rising material costs. It had a further 199 contracted sales agreements in place at the end of last month.

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“While down half-on-half, our residential development business performed well in the face of a softer New Zealand housing market,” Taylor said.

“The combination of the quality of the communities and product we develop, with a skew towards a lower average unit price has meant we continue to sell reasonable volumes at good margins.”

The company had good stocks of houses priced below $1m in Auckland, its most resilient market segment which accounted for about two thirds of its sales year to date.

In response to the softening market, the company had slowed or paused work on some residential and apartment developments and limited new land purchase agreements.

“We have Fletcher Building well positioned to perform through what will be a more uncertain market,” Taylor said.

About half of the wider group's revenues are exposed to the residential property market and Taylor said the softer housing market was likely to flow through to lower volumes in the company’s building materials and distributions businesses.

It expects volumes in those businesses to fall by 10% to 15% compared with the first half of the year.

The company was preparing its cost base for the slowdown and aimed to hold margins close to this year’s levels despite the softening, he said.

Fletcher Building expects to sell 800 houses in the current financial year to June 30, down from its previous expectation of about 1100. To reach its new target, it has to sell about another 400 units in the remaining five months of its financial year.

That meant it had to step up its sales rate to about 20 to 22 a week from about 16, said chief financial officer Bevan McKenzie.

In a note published yesterday, Forsyth Barr analysts Rohan Koreman-Smit and Paul Koraua said the sales target would be “a challenge in the current environment”.

Taylor said the target was “absolutely doable”.

It was in line with the rate the company was currently achieving, although a bit higher because they had more developments available to sell from, he said.

“It's quite a thoughtful target and one that I think we can achieve,” he said. “We're confident, but you've actually got to get out and sell the houses.”

Fletcher Building needs to meet that target to reach the top end of its full-year profit guidance, for operating profit of between $800m to $855m. It is targeting full-year operating profit of about $185m for its residential and development business.

The company said market activity and house sales for the remainder of the financial year would be the key driver of its result.

It said it had a tight focus on managing land and housing inventories.

It also expected to sell about 800 houses next financial year and would only pursue higher growth when market conditions were supportive.

“While the market remains softer, we'll adjust our capital envelope and sales volume expectations to suit the market and only return to a growth focus when market conditions allow,” Taylor said.

The company said it was rebuilding its land and housing stocks in the first half following a significant drawdown over the past two years, and it expected material cash inflow over the second half of the year.