Home is defined as a single-family residence and includes attached and detached single-family residential homes.
Home Building Business Model
REVENUE
Total overall revenue includes home building revenue and financial services revenue. Home building revenue consists of home revenue and land revenue. The home revenue for a given period is calculated by multiplying the number of homes delivered by the average selling price of those homes.
HOMES DELIVERED, BACKLOG AND NET NEW ORDERS
Homes delivered to customers represent the total number of deliveries of homes to buyers during a specified period. Homes delivered is derived by multiplying the backlog conversion rate times the beginning backlog.
Backlog consists of homes under a purchase contract but not yet delivered to a homebuyer.
The ending backlog represents the number of homes in the backlog from the previous period, plus the number of net orders (new orders for homes less cancellations) generated during the current period, minus the number of homes delivered during the current period.
The backlog at any given time is affected by cancellations, homes delivered and community counts. The backlog value represents potential future housing revenues from homes in the backlog. Finally, the backlog conversion rate is the number of homes delivered in a given period divided by the respective period’s beginning backlog.
Net new orders (new orders for homes less cancellations) are directly affected by community count, where community is defined as a single land development in which new homes are constructed as part of an integrated plan. Community count is the number of communities that are open for sales of homes.
The community development process mainly consists of the following phases:
- Acquisition of land
- Site planning and design
- Development of land into finished lots
- Construction and marketing of homes
- Delivery of completed homes
The community development process typically takes 6-18 months and depends on various factors like local, state and federal statutes; the process of government approvals and utility service activations; type of offering; the size of the community; financing; availability of construction materials and skilled labor; weather conditions; consumer demand; and economic conditions of the housing industry.
Communities offer various home designs, including single-family detached, condominium-style units, and multiple-story structures or duplexes that vary significantly in size and amenities. Companies typically provide a variety of house floor plans and elevations in each community with interior options and upgrades as well as exterior facades. They also build one to three model homes for each community so that prospective homebuyers can preview the designs and features available.
The absorption rate/contracts per community represent the number of net new home orders divided by the average community for the period. The U.K. market uses different terminology for similar concepts: communities are called sites; net new orders are called private reservations; backlog is referred to as the order book.
LAND
Developable land for the production of homes is a core resource for the business. Companies invest and purchase land in attractive markets that meet their investment return standards. However, they may also periodically sell land parcels to third parties for commercial or other development. When acquiring new land, companies focus on parcels with lots zoned for residential construction. These parcels are either “finished lots,” which are fully developed to start home construction, or partially finished lots.
PRIVATE HOUSING AND AFFORDABLE HOUSING
There are two primary types of houses built in the U.K.: Private housing and affordable/social housing.
Private housing refers to home sales to private owners, whether they are owner-occupied or rented privately. In the U.K., this excludes social housing.
Affordable or social housing consists of homes sold to housing associations that help deliver homes to lower-income residents. Housing associations are established to provide affordable houses on a non-profit basis. Eligible households receive affordable housing based on their income and local house prices. Based on the rent charged, these homes can be broadly classified as:
- Social Rented: Target rents defined as per the national rent regime
- Affordable Rented: No more than 80% of the local market rent.
- Intermediate Housing: Homes for sale or rent provided at a cost above social rent but below local market levels
PROFITABILITY
To evaluate profitability, analysts focus on gross margins, EBIT margins, pre-tax margins and net margins. Gross margins are particularly important due to the industry’s high construction costs. Companies with strong expense management skills have better gross margins.
Key performance indicators (KPIs) are the most important business metrics for a particular industry. When understanding market expectations for home building, whether at a company or industry level, here are some of the home building KPIs to consider:
Industry KPI Terms & Definitions
Home
Home is defined as a single-family residence and includes attached and detached single-family residential homes.
Absorption Rate/Contracts Per Community
Absorption rate is the number of net new home orders divided by average sales locations. In the U.K., contracts per community are also known as sales per site.
Backlog
Backlog consists of homes sold under sales contracts not yet delivered to customers. U.K. home builders use the term “order book” instead of backlog.
Homes Closed (homes delivered)
Homes closed, or homes delivered, represents the homes delivered to the customers since the project opened.
Average Selling Price
Average selling price of the homes delivered, calculated as revenue divided by homes delivered.
Average Backlog Price
Average backlog price is derived using backlog volume divided by backlog value.
Average Order Price
Average order price using net new orders divided by order value
Backlog Conversion Rate
Backlog conversion rate represents the number of homes delivered/closed in a given period divided by the backlog at the beginning of the period. The majority of analysts use volume as the base when computing the backlog conversion rate. Alternatively, this can be calculated as realized revenue divided by the backlog.
Cancellation Rate
Cancellation rate of booked homes for the period can be derived as number of canceled units by gross orders.
Net New Orders
Net new orders consist of homes sold under sales contracts minus the cancellation of homes booked for the period. U.K. home builders use the term “reservations” instead of net new orders.
Communities/Sites
A community is a single development in which new homes are constructed as part of an integrated plan. Community count denotes the number of communities that have opened for home sales. In the U.K., home builders use the term “sites” rather than communities.
Housing Associations
Housing associations in England are independent societies, bodies of trustees or companies established to provide low-cost social housing on a non-profit-making basis.
Private Housing
The private housing sector or non-social housing sector (i.e., owner-occupied household space and those rented privately), including those that go with a job or business and those not owned by housing associations
Affordable/Social Housing
Affordable housing is social rented, affordable rented and intermediate housing for eligible households, which is determined by local incomes and local house prices. Local authorities and private registered providers own social rented housing.
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Guide to Home Building KPIs for Investment Professionals
This guide highlights the key performance indicators for the home building industry and where investors should look to find an investment edge, including:
- Home Building Industry Business Model & Diagram
- Key Home Building Metrics PLUS Visible Alpha’s Standardized Industry Metrics
- Available Comp Tables
- Industry KPI Terms & Definitions
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