A Roof Over Their Heads
By JOHN BULL
Athe row with the Minister of Housing earlier this week showed, the building industry is. in a bitter mood. It reckons that the chances of completing 400,000 houses this year (the 1965 total was 391,000) are dwindling fast and that the selective employment tax (SET) will take all the profit out of the business. And yet the Government, according to the National Plan, is aiming at 500,000 a year by 1970.
It is easy to account for the lack of progress. Demand has been checked by the mortgage muddle, by the disappearance of bank credit, and by a sharp rise in prices. The builders for their part say that the increased cost of a new house merely reflects the shortage of land, the nay building material prices have been creeping up and the continuing growth of wages. Finally, there is SET, which the Government admitted in the Commons on Monday would add some 2 per cent to costs. It is a depressing picture.
Nor are the long-term implications much better. Builders cannot be expected to invest in expensive new equipment or to reform the struc- ture of their industry in these circumstances. Nor can their suppliers be blamed if they are not exactly enthusiastic about laying down fresh capacity. Nobody will even bother to read the National Plan until conditions improve. Halted at home, Richard Costain, for instance, has de- liberately looked for estate development oppor- tunities abroad. As a result, it has half shares in big schemes in Western Germany and Spain. But few have that sort of escape route open to them.
Certainly the brick-makers have not. About three-quarters of their output goes to the house- builders. And the ups and downs in the demand for houses are magnified for the brick-makers by what the Americans call 'inventory' adjustment— that is, running down or expanding stocks.
The brick-makers, of course, are much more interested in private housing than in local- authority building. One reason is that over half the homes built in the public sector are in the form of flats. Another is that the private sector anyway uses more bricks per house. So when we see that orders for new housing in the first quarter of the year fell by about one-seventh, me do not have the picture which the brick- makers see. For them, the key statistic is that orders received by private developers dropped by over a quarter. And they will also note that over the past twelve months stocks in hand have grown sixfold. The brick-makers also face the problem of the increasing use of industrialised building methods. However, it is instructive to ee how a company like London Brick, the leader of the industry, is reacting to the situation.
First of all, LONDON BRICK makes the right Ilpe of brick, fletton. Flettons are made from Oxford blue clay and because of their -superior qualities have gradually increased their share of the total brick market. Secondly, the group reckons to do better than the rest of the industry through making use of the economies of size. And thirdly, it believes that it can turn its raw material into the type of product which indus- trialised building techniques require—sixty yards of clay block flooring, for instance, can now be lifted from the delivery vehicle and laid in Position by a tower crane in one hour. The tile-makers and the composition-flooring manufacturers are also looking anxiously at the figures for new house starts. Like the brick- makers, the tile industry depends largely- upon the private sector. And similarly, new methods of work are displacing the traditional materials. REDLAND HOLDINGS has most at stake here. In fact, partly as a result of mergers, its activities cover the whole range of building supplies, from bricks to gravel quarries. There are two- points to notice about Redland. Its roofing-tile business is a highly efficient one, providing a decent profit margin. And its important German subsidiary, Braas and Company, consistently produces brilliant results.
MARLEY TILE is the other big concrete roofing- tile manufacturer. But it has diversified most suc- cessfully into plastic products like floor and wall tiles, polythene pipes for plumbing and polysty- rene insulations. The group has also sensibly made sure that it is represented in the `do-it- yourself' market. However, Marley Tile's recent results hive been shocking. In the first three months of the year profits before tax slumped by a quarter from just over the £1 million mark. But the second three months was even worse. Profits were nearly halved to £465,000. This is what the sudden end to the building boom means. And it cannot be expected that London Brick or Redland will be doing all that much better. Shareholders must stand back from the figures and take stock.
First, dividend yields : LONDON BRICK retursn 4.7 per cent, REDLAND 4.3 per cent and MARLEY TILE 5 per cent. Are they high enough, given that 1966 looks like being a poor year? The answer is a lukewarm yes: but when one turns to the relationship between the share price and likely profits this year, there is no comfort. Marley Tile looks to be selling at more than twenty years' purchase of earnings, and London Brick and Redland at roughly similar levels. The medium-term prospects for the market which these companies serve do not justify this kind of rating.
The big construction groups such as Costain, Taylor Woodrow and John Laing are also facing a difficult year. But their greater attachment to the public sector, their strong positions in indus- trialised building systems, and their wide spread of customers, make them less vulnerable. It is the small builder who is really in trouble.
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