Fresh fields beckon for builders

It used to be safe as houses. Now takeovers and taxes are shaking up the sector
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The Independent Online

Housebuilders in the UK are not exactly exotic. Run by clubbable and conservative executives, mostly British owned and often with large family shareholdings, these companies do little to attract controversy or, usually, interest. Deals within the sector tend to be friendly - witness Persimmon's recent acquisition of its rival Westbury for £643m, the first major deal since Taylor Woodrow's takeover of Wilson Connolly in 2003.

But cracks began to appear in the cosy world of house building last week. Activist investor Christopher Mills launched an unsolicited, £197m bid for MJ Gleeson, whose board promptly rejected it (see right). A spurned Mr Mills said the response was "barking mad", lambasting the builder's performance as "awful". Indeed, Gleeson, which is 30 per cent owned by family members, lost £13m last year.

Given that house prices had been enjoying double-digit inflation until recently, the casual observer could be forgiven for thinking that Mr Mills had a point. But builders are in a state of upheaval, despite - some may say because of - sky-high property prices. The Government is in the middle of what could prove to be the largest shake-up in the much maligned planning system since the Second World War as it tries to stimulate low levels of house building. Companies suspect that the only certain result will be higher taxes. Add in soaring construction costs and falling prices for new homes, and the picture does not look so rosy. No wonder Mr Mills feels miffed that Gleeson turned its nose up at his offer, which was at a 27 per cent premium to its share price.

Last month, the Government finally published its response to the 2004 Barker report, which looked at ways of raising the volume of new housing from 150,000 homes a year to 200,000. Its recommendations included setting regional targets for new homes; imposing rolling quotas on local councils determining the amount of land to be released for building; more social housing and more construction on brownfield sites (land that has been used in the past for urban or industrial purposes). The Government's consultation on these proposals closes at the end of next month, and the Chancellor, Gordon Brown, is expected to give more details in his Budget in April.

"The current system is cumbersome, not transparent and inefficient," says Ian Robertson, the chief executive of Wilson Bowden and one of the few in the sector happy to talk publicly about the need for change.

Developers have to negotiate with local councils - whose planning committees are responsible for approving or rejecting applications - over how much to pay the council towards the cost of upgrading the infrastructure. This could include, for example, construction of a road giving access to the new development, or providing a school for its new residents.

Each so-called Section 106 agreement has to be negotiated separately and is hard to predict. According to Mr Robertson, councils sometimes use them to hold developers to ransom, threatening to refuse permission if, for example, a developer does not fund new amenities such as a public library, even if it is several miles from the proposed site. "The system militates against development. We have had some outrageous demands under Section 106," he says.

But it is not really the councils' fault. Dominic Maxwell, a research fellow at the Institute for Public Policy Research, a think-tank, explains that it is often not in councils' interest to award planning permission. Funding agreed under Section 106 does not always cover the cost of providing extra services, while it is central government - through business taxes on the development - that benefits most, rather than hard-pressed local councils.

The Barker report's most far-reaching and contentious proposal - and one that is being backed by the Government - is a new windfall tax on planning approvals. Called the Planning Grant Supplement (PGS), it would be paid to the council by developers, based on the value of the land once planning approval has been given. This means that developers would know how much tax they have to pay before buying land, rather than having to take a risk on being able to make a return, as is the case now under Section 106. The process would be simpler for councils, too, which theoretically would pocket more of the money from developers, at the expense of central government.

Mr Robertson is in favour of the new tax in principle, as it would help companies show groups lobbying against development projects the extra services that would result if they went ahead. But along with the rest of the industry, he fears it could lead to a higher tax burden on developers, or eventually a more general tax on land, which would have to be paid whether or not the land was being used.

Mr Maxwell agrees. "PGS could be one step towards a land value tax. Taxes on transactions, as we have at the moment, act as a disincentive for building. Instead, a land value tax would discourage owners from holding vacant land, or empty homes. And it would encourage council planners to approve developments and investments in their areas, as they would increase the value of the land being used, and their tax revenues."

Whatever happens, the Government will not decide on the level of the PGS - or even whether to go ahead with it - until 2008.

Analysts say the sector has more pressing concerns. Most of the obvious takeover deals have been done, even though housebuilders are far smaller than their suppliers, for example, and would benefit from greater economies of scale to give them greater bargaining power.

Philip Sparks, an analyst with Evolution Securities, predicts defensive mergers among the smaller players as they try to keep up with the likes of Taylor Woodrow and Persimmon.

As the Government promises to make it easier to get planning permission, the mood among housebuilders is summed up by Simon Brown from stockbroker Williams de Broë: "They'll believe it when they see it."

Circus scion throws his hat in the ring

Activist shareholder, scion of a circus dynasty or simply rich? How about all three?

Christopher Mills, 53 - who last week made an unsuccessful bid for housebuilder MJ Gleeson - may not be as well known outside the Square Mile as his grandfather, the Big Top impresario Bertram Mills, but he has amassed a small fortune in the City. He became the highest-paid director of a British company in 2002 after receiving a £5.4m salary package, and is now thought to be worth £25m.

His favoured method is to build stakes in companies and then launch a bid or put pressure on management - as when he forced Greg Hutchings, the chief executive of Tomkins, to resign.

For nearly 20 years, Mr Mills's career was tied to Invesco MIM (now part of Amvescap). But he also set up his own ventures, such as the North Atlantic Smaller Companies Investment Trust, which has £700m under management. He launched JO Hambro Capital Management, with James Hambro, after quitting Invesco in 1993.

His latest venture is Castle Acquisitions, which was spun out of Lonrho Africa. It holds Lonrho's pension fund, and Mr Mills is thought to want to invest around £12m of its £27.5m surplus in Gleeson. The builder, however, has rejected the approach and Mr Mills is now lobbying fellow shareholders; North Atlantic Value, where he is chief investment officer, owns 7.7 per cent of Gleeson.

It is his second deal in as many months, following a successful bid for engineer Dowding & Mills, which has a crippling £26m pension deficit. But he has not been run off his feet.

"He went through a purple patch a few years ago but has been much quieter of late," notes one fund manger. "Christopher has tended to look for deep value and the tech boom, and the market generally has not been conducive to that."

In fact, Mr Mills doesn't always get things his own way. Quarto, a publisher, rebuffed his takeover attempts and, in 2003, Hambro was accused by Mercury Air of acting improperly when it took a stake in the US services group.

Eventually, Mercury dropped legal charges and agreed to buy Hambro's stake. Under the settlement, Mercury acquired the stake at a 30 per cent premium. And that is how millionaires are made.

Abigail Townsend

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