About Watkin Jones

Chairman's Statement

For the year ending 30 September 2009

This statement forms part of the Directors’ Report.

I am delighted to be able to report a very positive set of results for the Group, achieved in what has undoubtedly been one of the most difficult years on record for the property industry.

The Group made a profit for the year before goodwill amortisation and tax of £12.3m, on sales £17.2m lower than last year at £95.9m.

The underlying activity for the Group was broadly in line with last year, with work on student accommodation continuing to represent a major part of the Group’s activity. The student accommodation market has remained relatively strong compared to its piers, supported by the sound fundamentals of strong student demand, a shortage of quality accommodation and increasing rents. However, the inertia within the property investment market in the earlier part of the year caused by the lack of liquidity led to a delay in securing sales of two of our student schemes in the year, with a combined value of approximately £30m. I am pleased to say that the market has changed significantly in the last six months, with institutional investors becoming increasingly attracted to the excellent investment opportunity that prime student accommodation represents. As a consequence we are now in the fortunate position that we are at an advanced stage of negotiation with a number of different investors for the sale of our current developments and we expect these sales to complete early in 2010.

As a Group we were able to respond quickly to the difficulties in the market place, using the diversity of our expertise to target those areas in addition to student accommodation that have remained active. We have also focussed on developing opportunities with our clients and partners that do not require us to secure additional funding on our own account. The result of this approach is that we now have an outstanding pipeline of student development opportunities with a number of prestigious blue chip clients, creating the platform for a period of significant and exciting growth for the Group.

Balance Sheet and Funding 

Given the difficult credit conditions, we have adopted a clear strategy to conserve and develop the Group’s cash reserves. The imminent sale of a number of our student developments will significantly enhance our cash position and will lead to a marked reduction in net debt.

We have limited the number of new site purchases that we have made in the year, with the result that our land bank showed a modest increase of £6.3m to £95.3m. However, we have remained very active in identifying excellent site opportunities, mainly for student accommodation in the primary University cities, notably London and Edinburgh, but we are generally ensuring that these are backed up by a negotiated pre-sale of the development, and where appropriate a University lease, before any funding commitment is required.

Within our land bank we continue to hold a number of prime residential sites which will realise their potential in the future.
Work in progress for the Group increased in the year by £40.4m to £99.9m. This was a significant increase, caused in part by the fact that we did not sell the two student developments that I referred to above. We also had several new student schemes in progress at the year end, most of which are now the subject of agreed sales.

Land and work in progress is stated in the accounts at the lower of cost and net realisable value. The Board has again reviewed the value at which each of the Group’s sites is stated in the accounts and is satisfied that no write downs are required. This conclusion is strengthened by the fact that we have seen a significant improvement in the pricing of student accommodation, with yields moving progressively down, and residential sales values also gaining since the start of the year.

We continue to receive excellent support from our Banks and their confidence in the Group and its future is clear. In October we renewed our working capital facility for a further 12 months and we are currently negotiating a further increase to our Revolving Credit Facilities with the Lloyds Banking Group, which should be concluded in the early part of 2010. Our current facility of £100m is not due to be renewed until June 2011, but the further increase will enable some additional significant development opportunities to be realised in the coming year, which will further enhance the Group’s cash position over the next two years.

Shareholders’ funds increased by £8.4m to £52.7m. No dividend is proposed as profits earned will be used to invest in the future development of the Group.

Trading Review 

The Student Accommodation Division was undoubtedly the major contributor to the Groups performance in 2009. We successfully completed developments across the UK, including market leading schemes in Birmingham, Bristol, Leeds and Liverpool, delivering in total some 2,500 beds.  We also commenced new schemes in Newcastle, Ipswich and Kingston-Upon-Thames and two developments under contract in Edinburgh for delivery in 2010. The specification for our developments is being continually enhanced and we are now at the forefront of this sector, making our developments a sought after choice for both students and investors.  We have an excellent reputation with our clients who recognise our ability to continually deliver high quality, often complex developments, ahead of programme and to budget. We are able to offer a complete turnkey solution, from site finding, through planning and delivery, to the letting and ongoing management of the completed development and we will always work with our clients to ensure that their investment expectations are realised.

In spite of the depressed market conditions the Construction Division also had a successful year.  We were proactive at an early stage in identifying and targeting those sectors which remained robust and as a consequence have successfully negotiated and completed schemes in the food retail, healthcare and budget hotel sectors. We are currently concluding formalities to enable us to commence a large food retail development early in 2010.

The Homes Division has focussed on completing sites in progress and selling existing stock. Throughout the year we have seen sales being achieved across our sites in North Wales and in the last six months there has been a noticeable pick up in sales levels. This has been particularly evident at the prestigious Victoria Dock development in Caernarfon.  The Division has also been very successful in securing Housing Association contracts to deliver affordable housing on sites which we own, in certain cases by obtaining a change of planning consent to provide purely affordable housing rather than open market housing. In so doing, the Division has been able to maintain a profitable level of work and generate a positive cashflow without needing to invest in speculative new sites.

The residential apartment market remains difficult in terms of sales. However, we took the decision early in the year to let the new apartments that we have completed in Sheffield and Droylsden, East Manchester, rather than to sell them at discounted values. This strategy has proved successful, with high demand ensuring that virtually all of our apartments were let within a short time. We are now achieving a good level of return on these developments and are comfortable with this position until such time as it is appropriate to market the apartments for sale.

Future Prospects

There are encouraging signs that the market is starting to recover. This is very evident for the student accommodation sector and I am extremely optimistic about its potential. The sector is now reaching maturity as an asset class and the entry of new major investment funds into the market, combined with our pipeline of prime sites, means that we are presented with an unparalleled growth opportunity.

Our Construction Division will continue to focus on those sectors which are more buoyant and we are confident that a good level of profitable work will be maintained. It is encouraging that we have seen an increase in the number and quality of tender opportunities, albeit that competition remains fierce in many cases.  We will continue to work hard to support our existing clients to ensure that opportunities are realised.

For the year ahead the Homes Division has secured a good level of Housing Association contracts. In addition, given the improvement in residential sales activity, we have taken the decision to commence a small number of new developments in selected locations where we are confident that sales will be achieved. We will, however, maintain a cautious approach to starting new developments until we have confidence that the market is properly recovering.  Our land bank of nearly 2,500 plots will enable us to benefit in due course from a sustained recovery in the housing market. 

Cash management will remain a key focus and through the sales of our student accommodation stock we expect to realise a progressive and significant increase in our cash reserves and reduction in debt. This will provide a firm basis of cash strength from which we will be able to expand the business further.
Through the steps that we have taken and the strategic relationships that we have developed, I believe that the Group is in the strongest possible position to realise the many opportunities which are now presenting.  I am entirely positive in the immediate and future prospects for the Group.

The Environment

By their nature, the Group’s activities impact on the Environment.  We take our responsibilities in this regard seriously and are committed to taking actions which protect and enhance the environment at large and which mitigate against any possible adverse impacts.  Our procedures are designed to ensure that we comply with the requirements of relevant legislation and adopt best practice wherever possible.

Employees

The success of the Group is attributable to the hard work and commitment of all our staff. This has been required more than ever in the extremely difficult market conditions that we have faced. But our achievements have been exceptional and I would like to thank all our employees for their contribution.  The tremendous prospects for the Group in the coming years will equally present many exciting challenges and opportunities for our staff.

G Watkin Jones
Chairman
17 December 2009