Built on strong foundations

Built on strong foundations

Southdale Homes has reached its 25th anniversary in tough conditions mainly because of how nimble it can be, its managing director tells Peter Baber.

Most people say the one exceptional thing about Gibbet Street, a drab road which cuts through central Halifax, is that there is indeed a restored gibbet at one end of it. For the rest of its course of just over a mile, it runs gently uphill through just the sort of unprepossessing mostly industrial landscape you see near the centre of many West Yorkshire towns.

Yet about half way up, there is perhaps one other striking feature – a reservoir with an unusual turreted wall running around it. And sitting quietly right next to this landmark is the headquarters of a housebuilder that appears to be weathering the current downturn well.

In fact, Southdale Homes (whose entrance is actually just off Gibbet Street, but we won’t quibble about that) is bearing up remarkably well when you consider the absolute turmoil the housebuilding sector has been through since the start of the recession – and continues to weather today.

Consort Homes (whose adverts used to feature prominently only a few streets away from Southdale in Pellon) was one of the first to go in 2008. But just before Christmas last year we had the collapse of Britannia, a once proud housebuilder that had been sparking off developments all over West Yorkshire.

In between there have been the more nationally noted collapses of Rok, whose chief executive was still urging his staff to “keep on Rok-ing” as the men in grey suits were on their way and thousands of them were soon to be handed their P45s, and Connaught.

And even Keepmoat, one of the best known names in the sector in Yorkshire, has been through the wars. In March last year it went through a merger with social house builder Apollo that led to an immediate 200 redundancies. Then later in the year its new boss Ian Sutcliffe left after just nine months in the job, one of 10 directors to leave in 2012.

The days when its MBO backed by what was then HBOS was feted as one of the best and biggest deals in Yorkshire are a distant memory. Southdale managing director Paul Moore admits that the fallout from all this has not been particularly pleasant for anyone in the sector. “A lot of established organisations have gone to the wall, and that hasn’t done our industry any favours,” he says.

“The demise of Connaught and Rok has shaken the industry and made people more cautious, and it has put more red tape in the way of doing business. Lenders have started saying: ‘Let’s take some further precautionary measures.’ Everyone has become quite nervous about anything to do with construction.”

Yet Southdale is still ploughing ahead. Currently operating not just from Halifax but also from two satellite offices in Warrington and Darlington, the company looks set to turn over £80m in the next year, build 900 affordable houses, and take its staff number up from 130 to 150.

In a joint venture with Strata, another housebuilder based in Doncaster, it has put in a bid in to be accepted onto the Homes and Communities Agency’s second Delivery Partner Panel (DPP2), which could potentially make it eligible to bid for considerably larger projects than the sites of 50 units that are its sweet spot now. And unlike Keepmoat, senior staff have not been deserting in droves either. In fact, in 2010, the company even managed to go through an MBO which saw four more senior managers take a stake in the company and join the board.

All of the members of the current board have worked for the company since at least the year 2000. So why is it doing relatively well when others are foundering? Moore, who joined the company 19 years ago when it had just six staff, puts success down to the fact that throughout those 19 years and beyond the company has remained exclusively in private hands.

“Whatever the macro economics have thrown at us, the one thing about us is that we are relatively nimble on our feet,” he says. “You have to change if the macro economics have significant changes.” Southdale was formed 25 years ago by Chris Harris, a former senior manager at Marks & Spencer who had left to set up a chain of Benetton shops across Yorkshire, and John O’Hara, who, bizarrely, was the landlord of Harris’ local.

“John’s day job was as a builder,” says Moore. “He and Chris hit if off, and it wasn’t long before John was going to fit out Chris’ shops. Then one day Chris said: ‘How do you fancy coming in with me and building half a dozen houses?’ They both packed their respective businesses up to start the company, initially building private spec housing in Calderdale.”

The name Southdale was the name of Harris’ house at the time, and according to Moore, although the company moved into its current quarters, a former engineering works, a few years ago, the end terrace house in Boothtown which was the company’s head office when he first started working there still bears the company name etched in glass on the front window.

Because the birth of the company coincided with the last big recession the UK has been through, Moore says the first five years were all about survival. “When I joined in 1994 we were just starting to break into affordable housing,” he says.

“We needed another income stream. By the turn of the century, by which time we were probably doing 150 units a year, we had a business model where 30 to 40% was private spec, and the rest affordable housing. That made sense because the contracting business is cash generative, but low margin. That supported private spec which is very cash intensive, but high margin.”

A key project the company delivered around this time, and one that brought it well into the limelight, was the redevelopment of a significant part of the Deighton estate in Huddersfield. “That really has been the backbone to our success,” says Moore, “Particularly after it won a What House? gold award.”

In 2003 Moore, who is currently 41, took a stake in the business along with development director Declan McHugh, so that what had previously been a straightforward 50/50 split in ownership between Harris and O’Hara became a 40/40/10/10 split, with the two new men each gaining 10%. Not long after this the company had got to such a size that it had a business plan to have two £50m turnover businesses by 2010 – one in affordable housing, and one in private spec.

“But to get there we decided that we needed two almost separate companies, with separate boards,” he says. “I was very keen on that idea. I always say that building private spec and affordable housing is a bit like football and rugby. They are games with two teams and a ball – but that’s all they really have in common. Affordable housing tends to be all about how quick we can start and finish, whereas private spec is all controlled by the market.”

The company was well on the way to achieving such an ambition when the downturn happened. It is at this point, Moore says, where its virtues as a small but lithe operator really came to the fore.

“We decided to throw a blanket over the private spec side of our business because we thought we didn’t need to play this arena,” he says. “We were in a reasonably strong position because we weren’t over-committed landwise. We had four pieces of land, so we decided anything that had foundations in we would build and sell, and anything that didn’t we would throw a blanket over. We have now got only one piece of land – the rest we have either sold or developed for registered provider clients.”

As the economic climate worsened, once again the company was able to go through a number of restructures relatively rapidly. This did not entail letting go of a huge number of people – Moore says the company has always operated more as a “construction management company” than as a traditional construction firm. “We don’t employ joiners,” he says.

“The only people we really have on site employed directly by us are site managers, drivers and site operatives.” But even still, the restructures have proved effective. “One thing that really paid off is that we went regional,” says Moore, “and started running regions almost as separate business units with their own profit and cost centres. Previously the board had been very vertical, with a technical director, commercial director, and so on. It was much more efficient and gave us more control to have regional directors responsible for all disciplines.”

As a result, although the private spec side of the business may have fallen by the wayside, Southdale was at least able to smash its 2010 turnover target for its affordable housing business. Its North West region, operated out of Warrington, is doing particularly well.

“The market there is bigger than Yorkshire and the Humber and the North East put together,” says Moore. “We opened the Warrington office in 2010, and we are already about to move to our third set of offices there in as many years.”

While it is just one affordable housing market the company now operates in, Moore says that term can still mask a widely differing range of ownership structures.

“There is social affordable rent, market rent, shared ownership, and intermediate market rent where customers can come in, rent the property for a period, and then have an option to buy. And even though we have put a blanket over private spec, we still employ a private spec sales and marketing manager, because we need to provide such a service to our clients. Even with shared ownership, some clients still do an outright sale. Getting the right mix in the right area and at the right price is what affordable housing is all about.”

He also says it would be a mistake to assume that the affordable housing market itself hasn’t been through some radical changes. It has. Although the majority of Southdale’s clients are registered social providers, Moore says the way the market is structured means that essentially the company’s ultimate paymaster is central Government through housing grant.

“Up to a few years ago the average grant was about £45,000-£50,000 per unit, although it varied regionally. But when the new affordable housing programme was announced back in 2010 that grant was cut to around £20,000 to £22,000 per unit. So the amount of change our industry has had to go through is enormous. The type of property we were doing three to four years ago is significantly different from what we are doing now. We have had to do things more efficiently.”

Such a reduction clearly means that many players have left the market, although Moore insists that has not led to an easing in competition.

“If anything competition has been stiffer,” he says, “because for what work there is people have gone in hard.” But it has led to more operators looking at the possibility of building affordable housing without the need for any grant. That is certainly the model that Southdale is operating with Ignite, its joint venture with Strata.

“That delivers private sale and affordable housing sat alongside each other in a large critical mass,” says Moore.

“Strata was one of our partners at Deighton. Back in 2008 we had mothballed private sale, and in 2009 they had sold their construction arm. So we saw it was a marriage made in heaven. The model allows us as Southdale to do 30% of any development as affordable housing, with Strata doing the remaining 70% as private spec.

“We work alongside each other, and it tends to be on local authority-owned land, where we can pay in tranches or plot by plot. Strata is willing to take a slightly lower margin, because it is not having to pay all its up front costs, and that drop in margin we can put back into helping to build more affordable housing.”

So what, then, of the future? The DPP2 bid Ignite has mounted, and which they are due to hear the result of in April, is for the North and the Midlands, so does Moore see a possibility in moving Southdale’s operations further south? He is not so sure.

“We have got a job on in Leek, and we are happy to go down to Chesterfield,” he says. “We did set up a satellite office a couple of years ago for the Midlands, but it wasn’t hugely successful. We have now decided we will travel an hour and a half from either Warrington or Halifax southwards, but probably no further.”

He doesn’t necessarily rule out a re-entry into private housing again, “but not in a way we would compete with Strata”. “It would probably be more localised in and around Calderdale and West Yorkshire,” he says.

The company is also toying with the idea of offering services under the Green Deal as well, although it is waiting to see how the launch of such a scheme pans out before getting too involved. But the biggest future client base Moore can see sounds much more conventional.

“We will be working with local authorities because there is no doubt about it – local authorities are going to start developing again, and on their own land,” he says. When they do, one Halifax company will certainly be ready to help them.