Vistry blunder raises questions for investors

Only a few weeks ago Greg Fitzgerald, the chief executive and executive chairman of Vistry, said that his decision to go all-in on building affordable homes for housing associations and local councils might soon look “inspired”.
The move appears markedly less visionary following Vistry’s admission that it has underestimated the cost of completing nine developments in southern England. Britain’s second-biggest developer expects the budgeting bungle will sap £115 million from its profits over the next three years.
In the brief stock exchange update, Vistry did not explain exactly precisely what had gone on. All it would say was that its southern England division, its biggest regional business, had “understated” build costs.
• Vistry share price tumbles after profit warning
The miscalculations came to light on Friday and follow a change in how divisional finance chiefs report their numbers. Previously, they would feed forecasts to the regional managing director, who would relay them to the group finance chief, Tim Lawlor. Now, they report straight to Lawlor, which one analyst suggested could have “made it more likely that something would be questioned”.
Vistry is adamant that the problems are confined to the nine sites in southern England and assured shareholders that it had checked its 290-odd other developments up and down the country.
The stock market, however, does not seem convinced. The shares took a battering on Tuesday, knocking £1 billion from Vistry’s stock market valuation.
“If you only found out on Friday, how can you be so sure on Tuesday morning that you’ve perfectly reviewed 300 sites?” one industry insider said. “I think that is what [investors] are digesting at the moment.”
The size of the miscalculation has also caught the eye. “£115 million is a big rounding error,” a senior housebuilding executive said. “How can you be £13 million out on the maths [at each site]? It wouldn’t give me confidence around the control and audit.”
Vistry has begun an independent review into what happened and has declined to elaborate beyond its brief statement.
One theory is that the collapse of a groundworks subcontractor that Vistry was using meant it had to pay more than expected to find a last-minute replacement
A rival builder suggested it was a much more basic miscalculation. “It seems like [Vistry] has not been factoring in build-cost inflation over recent years, which is obviously mad,” they said.
The cost of everything from timber to tradesmen has jumped since the pandemic. Price rises have slowed in recent months, but for most materials and labour remain much higher than five years ago, when Vistry would have been running the maths on the nine sites.
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It will no doubt have concerned investors that Vistry’s regional management team in the south of England has apparently not been including contingencies when working out what their developments are going to cost. Are bosses in other divisions also not on top of their costings? Some in the industry said they would not be surprised.
Vistry is not the first housebuilder to mess up its numbers — Crest Nicholson is another recent example — but Vistry’s new strategy means its errors are more painful.
The benefit of the partnerships model is that the partners pay in advance for the homes, removing any risks about finding a seller. The downside of that, however, is that when unexpected costs arise, Vistry, by and large, has to swallow them.
By contrast, a rival developer might try to pass those costs onto customers or rising house prices might bail them out anyway.
“These cost hits are not that unusual in the sector, but other developers who sell gradually [to private buyers] have a chance of getting better sales prices, rebuilding their margins,” the housebuilding executive said. “At Vistry, with the fixed-revenue model, it is only going to be painful.”
It is thought that the nine sites in question had been earmarked as traditional developments but, following Vistry’s switch to partnerships, will now mostly comprise affordable rental homes. Blackstone, the US private equity giant, is among the customers.
“I think possibly the local team was hoping maybe to recover some of the cost overrun with higher house prices, but [the group] has moved to the partnership model and fixed in some prices, so there’s less cushion and room to manoeuvre,” a property industry source suggested.
As well as signalling investors’ fears about further profit warnings, Tuesday’s share price reaction is a reflection of the rapid ascent of Vistry shares.
The stock market has lapped up the change to partnerships, which has allowed Vistry to build more houses and make more money during the recent market downturn, whereas traditional developers have slowed their building rates.
Eye-catching growth predictions from Fitzgerald, 60, have also been a draw and Vistry is standing by its targets to double operating profits and return £1 billion to shareholders through dividends and share buybacks over the next three years.
Before Tuesday’s sell-off, Vistry shares had gained 60 per cent over the past 12 months, almost double the sector average. That left its shares trading at twice book value, whereas its peers trade at 1.2 times, on average. As one industry analyst said, Vistry shares were “priced for lots of good news”.
The consensus in the City is that this profit warning has not killed the partnerships model but is a reminder that it has its drawbacks, which Fitzgerald, so focused on growth, perhaps overlooked.