Springfield issues profit warning as rate hikes hit housing market

Elgin-based Springfield told investors that profits for the year ending May 31, 2023, would be lower than last year’s as it outlined the impact of rising interest rates and economic uncertainty on demand for private housing, while highlighting the effect of inflationary pressures on material and labour costs.

The company also highlighted concerns over its current prospects in the affordable housing market and said plans to deliver homes to the private rented sector would be delayed following the introduction by the Scottish Government of a temporary rent freeze.

READ MORE: Elgin-based Springfield declares urgent action needed to deliver more homes for Scotland

The challenges facing Springfield underline the impact on the housing market from rising interest rates in recent months, which has the seen the base rate steadily increased by the Bank of England in a bid to curb surging inflation.

The Bank’s Monetary Policy Committee increased the base rate by three-quarters of a percentage point to three per cent in November, its biggest rise in more than 30 years, in the wake for former Prime Minister Liz Truss’s mini-Budget, which unleashed chaos on the financial markets. Rate setters will meet again this week amid speculation members will vote for a more modest rise, with the UK economy now acknowledged to be in recession.

Speaking in September, Springfield chief executive Innes Smith conceded that the housing market had “softened” when it reported pre-tax profits of £19.7 million for the year ended May 31, 10% higher than the previous year. But he said the underlying market was strong, declaring that there are “not enough houses getting built in Scotland.” He noted: “Every year as an industry we are building about 18,000 homes – it should be about 25 [thousand].”

Mr Smith’s comments came shortly after Springfield had completed the acquisition of the housebuilding division of Glasgow-based Mactaggart & Mickel for nearly £50m. That followed Springfield’s £56.4m acquisition of Tulloch Homes last December.

READ MORE: Retailers demand action to lower Scottish business rates burden

Yesterday, the company signalled that the economic conditions had worsened since publishing its full-year results in September.

While noting that it had started the current year with a “strong order book and sustained demand in private housing” amid a “challenging market backdrop”, Springfield said: “Since then, the rise in interest rates and broader economic uncertainty have impacted reservations for the Group’s private housing.”

In the trading statement ahead of its results for the six months ended November 30 being announced, Springfield explained that the upward pressure on materials and labour costs seen across the industry has “become more acute as supply chain disruption has persisted and 7.5% inflation has been prudently applied to the Group’s future costs for H2.”

“Private house growth is no longer anticipated in the short-term rendering the increase in build costs more difficult to mitigate,” Springfield said.

READ MORE: Textile entrepreneur who wants us all to sleep better

The company, which employs around 900 people, went on to highlight challenges in the affordable housing market. It continues to hold back from entering new long-term fixed contracts in the sector, given the ongoing inflationary pressures facing contractors, and while it awaits a review by the Scottish Government of its benchmark price for affordable homes. Meantime, Springfield’s plans in the private rented space were “unlikely to come forward in the next couple of years following the Scottish Government’s introduction of a temporary rent freeze” in response to the cost-of-living crisis. “These factors are expected to combine to impact the Group’s margin and, as a result, the Group now expects to report profit before tax for FY 2023 below that of FY 2022,” it said.

In spite of the current market challenges, Springfield declared the “fundamentals of the business and of the housing market in Scotland remain strong.”

The company said: “There is an undersupply of housing across all tenures, and the Group offers high-quality, energy efficient homes in popular locations across the country – with greater affordability in Scotland compared with the UK as whole. The Scottish Government maintains its commitment to investing in the delivery of more affordable homes and the Group’s strategic land bank provides opportunities for land sales in the short term.”

Shares in Springfield closed down 11.11% at 80p.