Vistry: Constructing a Capital-Light Future
Summary
- Vistry has transitioned from a traditional housebuilding to a partnership only model positioning itself as the UK leader in affordable housing.
- Labour’s ambitious housing goals and policies, such as mandatory housing targets, fiscal stimulus and green/brown belt reallocation, align directly with vistry’s expertise.
- Recent cost overruns tied to the legacy housebuilding division have impacted near term financials. However, these issues are isolated, and the partnership business remains unaffected.
- In-house timber frame production, bulk material purchasing, and economies of scale further enhance cost efficiency, supporting long term profitability and competitive advantages.
Business
Vistry is a UK housebuilder which has historically operated in two primary business models: traditional housebuilding and partnerships. However, approximately a year ago, the company began phasing out its legacy housebuilding division to focus entirely on its partnership business. This transition is still underway, and Vistry has stopped reporting the two segments separately.
While other companies also employ the partnership model, Vistry is the clear leader in the sector now. In 2024, the company expects to deliver circa 17,500 homes. In contrast, Lovell and Keepmoat delivered 3,000 and 4,100 homes respectively in 2023.
Vistry’s scale and focus on the partnership model position it as a dominant player in the affordable housing space.
A fitting comparison for Vistry’s new model is the US-based homebuilder $NVR, a pioneer of the capital-light approach. A quick glance at NVR’s stock chart and outstanding shares since inception highlights its success in value creation. A former board member of NVR is now on Vistry’s board to help them with this strategic shift.
Additionally, the capital freed up by this transition would let the company return £1 billion in excess cash to shareholders, with another £300 million going to reduce the debt. £200 million of this buyback target has already been completed.
Moreover, beyond an initial buyback, management anticipates capital returns to amount to 50% of the operating income. With a near-term target of £800 million operating income, Vistry could return a significant amount back to shareholders via NVR-style buybacks.
Historical Timeline
Vistry, as it is known today, was officially formed in 2019 through the merger of Bovis Homes and Galliford Try’s housing division. Greg Fitzgerald, the current CEO, was previously the CEO of Galliford Try between 2005 and 2015, during which time the company grew substantially, including a significant expansion of its partnership business. After briefly serving as a chairman, he retired in 2016.
By 2017, Bovis Homes faced serious challenges. Fitzgerald, with his strong track record at Galliford Try, was brought out of retirement to rescue the struggling company. Under his leadership, Bovis recovered and was back on track in two years, and shortly thereafter, they acquired Galliford Try’s housing business.
However, it was the 2022 merger with Countryside Partnerships that truly shaped the Vistry we see today.
Before the pandemic, Countryside Partnerships was a shining example of the partnership model. By 2019, they were delivering 4,400 homes annually. Their partnership division, which accounted for roughly half of their profits, boasted a remarkable ROCE of 78%, far exceeding the typical 15-25% range for UK housebuilders. Despite these achievements, the market undervalued Countryside, granting it a P/E multiple of 10—lower than many peers. This reflected the market’s emphasis on valuing housebuilders by book value rather than earnings, penalizing those with higher returns on equity.
In response, then-CEO Ian Sutcliffe announced plans to split Countryside into two entities to unlock shareholder value. Unfortunately, the CEO had to step down due to personal reasons, and the new management scrapped the plans of a split, which left shareholders frustrated, attracting activist investor Brown West, which acquired a 10% stake and secured a board seat. Over the next year, the board and top executives resigned, and the board committed to a pure-play partnership business. Later, the company decided to sell, and in September 2022, Countryside agreed to a stock-for-stock merger with Vistry, creating the entity we recognize today.
The merger was largely successful. Management exceeded initial estimates for cost savings, and the stock price more than doubled following the merger. By September 2023, Vistry announced its decision to focus solely on partnerships, signaling a definitive shift in strategy.
Since then, the company has been winding down its non-partnership business, completing existing projects, reallocating suitable plots to the partnership division, and selling off the rest. This process is expected to free up approximately £1 billion in capital, of which £200 million has already been returned through buybacks and dividends.
However, challenges emerged in October 2023 when Vistry disclosed cost understatements amounting to £115 million on several sites. This revelation caused the stock price to plummet from £13 to £9.5. A month later, an additional £50 million in losses were identified, and the profit outlook was reduced from £350 million to £300 million, allocating 50% of the reduction to these one-time losses and the remaining to a slowing economy. This took the share price down to the present level of £6.3.
Despite these setbacks, there are reasons to believe that the market may be misinterpreting the implications of the issues, a topic we’ll explore in detail.
Partnership
Vistry’s partnership approach differs significantly from the traditional model used by most housebuilders. It involves collaborating with housing associations, local authorities, and private rental sector (PRS) investors to deliver a mix of affordable, PRS, and privately sold homes.
The structure of these partnerships varies by project. In some cases, the developer provides the land and allocates the units to partners. In others, partners such as housing associations might own the land and bring in Vistry to develop it. In either case, partners usually prepay for the units before the construction begins.
The traditional housebuilding process is well understood: developers identify a site, secure necessary approvals, and either purchase the land outright or via an option contract. Construction of individual homes typically takes 5 to 7 months. However, the partnerships model is a fundamentally different approach, emphasizing collaboration between homebuilders and public or private entities such as local governments or housing authorities.
In the partnership model, the developer forms a joint venture (JV) or enters into a contractual agreement with the public entity. These collaborations leverage resources and align objectives to deliver housing that meets both social and commercial needs. For example, Vistry may develop on donated land without forming a separate entity while still operating under principles of shared responsibility and benefits.
The partnership model enables efficient development by distributing risk, leveraging resources, and aligning incentives. It represents a shift from the speculative approach of traditional housebuilding to a collaborative framework designed to meet the needs of diverse stakeholders, including local communities.
Below are common structures of partnership JVs:
Development-Led Joint Venture
In this model, a local authority partners with a developer to purchase land, often receiving a cash payment upfront. The agreement specifies a timeline for the developer to complete construction on the site. Once the project is finished, the local authority receives a share of the profit.
Investor-Led Joint Venture
Here, a long-term investor such as a pension fund or real estate trust provides forward funding for a development and shares in the project’s financial risks. The local authority assumes the long-term operational risk for the completed development. Typically, the investor leases the land from the local authority and finances the construction with a homebuilder. Upon completion, the local authority leases back the homes from the investor for an agreed term. At the end of the lease, ownership of the asset reverts to the local authority, often for a nominal payment.
Limited Liability Joint Venture
This type of JV is established on a project-by-project basis. Local authorities may also secure strategic partnerships with developers to ensure continuity across multiple projects. Upon completion, the council and its partner may either retain or sell the completed assets. Retained properties may be transferred to the council’s housing company, an investor, or a new JV formed for long-term management.
