Tarmac shocks market by closing door on home sales

TOM STEVENSON

and NIC CICUTTI

The already-fragile housing market took another blow yesterday as Tarmac, Britain's biggest housebuilder, said it was putting its homes division up for sale. The move took analysts by surprise and prompted fresh calls from the construction and mortgage industries for government intervention to revive the market.

A management buyout is being tipped as the most likely exit for Tarmac, with a flotation ruled out under present market conditions and rivals expressing no interest in buying the division. Barratt said it had "no interest in all or part of Tarmac's operations". Wimpey declined to comment.

Tarmac's withdrawal from private-sector housing comes the day after Halifax Building Society released figures showing that house prices dropped by 0.7 per cent in July. The fall, the fifth in a row, marked the longest decline for two years.

House prices have now fallen by more than 3 per cent over the past year, with the rate of decline accelerating since the spring. Halifax has moved from forecasting a 3 per cent rise in house prices this year to predicting a flat market.

Tarmac's shares fell 6.5p to 108.5p yesterday as a wide range of possible values for the business emerged and analysts questioned what Tarmac would do with the proceeds.

The company is thought to expect well in excess of the division's net assets of pounds 339m, perhaps pounds 400m, but some analysts put a value of less than pounds 250m on the operation.

Neville Simms, Tarmac's chief executive, denied that the decision was in any way a comment on the state of the housing market. He said it reflected his company's inability to invest sufficiently in all three of its divisions given the cash-hungry nature of the housing business.

He said a strategic review had targeted investment needs in the company's other main operations. Tarmac is one of the UK's largest quarrying businesses and a leading road-builder. It is also trying to increase its presence overseas.

The disposal marks the latest stage in the reconstruction of Tarmac after Mr Simms took control three years ago. He inherited a heavily indebted, loss-making group that had been brought to its knees by the expansion of its housing division in the late 1980s.

Mr Simms admitted that in the past housing had received a disproportionate amount of group investment at the expense of quarrying and contracting.

Analysts generally agreed with the logic behind Tarmac's decision to pull out of housing ahead of what many expect to be a sharp downturn in housing starts, a continued fall in house prices and tighter margins. But some questioned its ability to re-invest the proceeds effectively.

Building societies and other mortgage lenders expressed concern at Tarmac's move, suggesting that it could drag the housing market lower.

"My initial reaction is surprise," said John Wriglesworth, head of strategy and research at Bradford & Bingley Building Society. "For an organisation that is such a major contributor to the industry to indicate that it is pulling out can't be good news.

"Having said that, people pull out of businesses all the time. If they get a good buyer and it is sold at a good price, it could give a positive signal. Tarmac's housebuilding business has been a profitable one."

Tarmac's housing division is one of the industry's most profitable and is expected to prove attractive to a range of buyers. Mr Simms would not comment on possible buyers, but it is thought unlikely that he would hoist the For Sale sign without a good indication of interest.

The division, which employs about 2,000 and sold more than 6,000 homes last year, made an operating profit of pounds 64.3m last year from turnover of pounds 485m, although analysts expected profits to fall to pounds 55m this year.

Adrian Coles, director general at the Council of Mortgage Lenders, said of the planned disposal: "It is an indication of the severe difficulties in the market. After the bad news of the past two days, with Halifax and Nationwide both showing another fall in house prices, plus a rise in repossessions and a low number of transactions, it is further evidence of gloom. It gives further weight to our argument that if the Government wants a return of confidence in owner-occupation, it must take steps to bring it about."

A spokesman for the Royal Institution of Chartered Surveyors described Tarmac's decision as a "statement of lack of faith in housing". He called for measures to attract first-time buyers into the market, including a stamp-duty holiday and greater tax relief.

Comment, page 17