Cala reports profits plunge after interest rate rises hit demand
HOUSEBUILDING heavyweight Cala has seen profits plunge after interest rate increases hit demand, in a reversal that will complicate efforts to sell the business.
Cala, which has significant operations in Scotland, made £42 million operating profit in the six months to June 30, compared with £68m in the same period of last year.
The fall in profits was revealed in the latest results announcement by Cala’s owner Legal & General.
The pensions and investment giant said the drop in profits at
Cala reflected “a combination of the higher interest rate environment and some planning delays”.
The comments provide further evidence of the challenges that housebuilders are facing following the interest rate increases the Bank of England imposed from December 2021 to curb the surge in inflation.
The Bank cut the official rate by 0.25% to 5% last week amid signs inflationary pressures have eased significantly.
However, mortgage rates remain much higher than they were before the Bank started to tighten policy.
Several housebuilders have highlighted the resulting pressures on demand for new homes. Planning issues have been highlighted as a concern by sector players for years.
The Labour government has promised to streamline the planning system, in support of its efforts to secure a huge increase in the number of new homes built.
However, it could take some time before the resulting changes have any impact.
The Scottish Government has control of the planning system in Scotland.
News of the downturn in trading at Cala comes two months after Legal & General raised the prospect of selling the business under new chief executive Antonio Simões.
Mr Simões succeeded long-term chief executive Sir Nigel Wilson in January. He previously ran Santander’s banking operations in Europe.
Under his leadership, Legal & General will concentrate on the retirement and asset management markets.
This will allow it to capitalise on the expected global increase in demand for products that will allow people around the world to save for retirement, as members of company schemes or individually.
Mr Simões said Legal & General was committed to helping address the long-term investment needs of individuals and society, and to creating compelling opportunities for partners to invest alongside the firm to generate positive change.
The group has launched an affordable housing fund, which it said yesterday would leverage pension capital to build new homes. It has secured £280m commitments from investors, including £120m from Greater Manchester Pension Fund.
“We are encouraged by the action being taken here in the UK to drive institutional capital towards productive assets, alongside progress on addressing structural barriers to investment, such as the planning system,” said Mr Simões.
Under Mr Wilson the group developed plans to use its financial clout to help tackle social challenges such as the shortage of housing in the UK.
The sale of Cala might allow the group to generate a profit that could be used to boost payouts to shareholders. It would release considerable amounts of capital tied up in land banks.
Mr Simões said yesterday that Legal & General was making clear progress on delivering its strategy.
The group increased core operating profit to £849m from £844m.
The group’s institutional business has capitalised on moves by companies to limit their pension liabilities by transferring schemes to insurance groups.
The retail business has been boosted by growth in the popularity of annuities following increases in interest rates.
Legal & General first invested in Cala in 2013. It acquired control of the business from Patron Capital Partners in 2018 for £315m in a deal which valued it at £605m.
Legal & General cut its exposure to some property developments amid the surge in building costs fuelled by inflation.
In 2020, the group announced plans to invest over £50m in a plan to create a hotel on the site of the former Debenhams store on Edinburgh’s Princes Street.
Three years later, the group put the site up for sale.
Cala developed out of the City of Aberdeen Land Association, which was founded in 1875.