Principal activities
The principal activity of the company is the construction of dwellings for group companies and others.
The directors consider the performance of the Group to be in line with expectations for the year ending 31 January 2024. This is considering the significant challenges the industry has faced and continues to face.
This has led to reduced financials year on year with the key financial metrics seen below:
£’000 | 2024 | 2023 |
Turnover | £25,650 | £28,123 |
Retained Earnings | -£178 | £130 |
Net Assets | £1,597 | £1,419 |
Return on Capital Employed | 10.3% | 10.5% |
Operational Metrics
During the year the following metrics were achieved:
Plot completions 35 (2023: 59)
Affordable Housing completions 45 (2023: 14)
Build starts 4 equating to 116 plots
Planning permissions 4 equating to 116 plots
Private plot completions have dropped year on year as the challenging market conditions continue to make buyers cautious. Sales activity remained uncertain owing to a lack of mortgage availability and affordability. However, confidence in the market is returning, although slower than we would like there are certainly signs of improvement given lower cancellation rates than we have seen historically.
We also note first time buyer activity has remained low, mainly due to the lack of availability of products in the market place. We are, however, seeing increased levels of customer engagement as we prepare to launch our First Homes product.
Demand amongst existing homeowners remained challenging with those opting to purchase requiring elevated levels of sales incentives and increased use of enablers such as Early Bird, Part exchange or Assisted Move to secure a sale.
During the year, we operated from 5 outlets, albeit 2 are considered as tail end sites. Our larger schemes provide a varied product range, indicating we should appeal to a wide audience, subject to implementation of a good marketing strategy which we continue to do.
Whilst in previous years, having lower brought forward stock, the rate of build and continued challenges in the planning cycle resulted in less plots available to sell we are now mindful to not over stock while demand is sensitive.
Supply chain issues endured during the Covid pandemic and more recently with the war in Ukraine have certainly eased in respect of availability of materials. However, the expectation of a reversal of price inflation has not eased off at the same pace which is having negative effects on margins. Our dedicated procurement team work tirelessly with key suppliers to overcome issues, constantly monitoring prices and keeping construction sites operational.
Planning consents remain challenging with local authorities struggling with resource constraints. However, we are pleased with the progress that has been made after years of liaison with all stakeholders that a number of our strategic sites are starting to come to fruition. So far, 4 of our strategic sites have now obtained planning permission equating to approximately 1,100 plots providing future certainty to the gorup. This will help hugely with the well documented housing shortages in the United Kingdom and our regional demographic.
We welcome the newly elected Labour Governments enthusiasm on housing and support its ambitious pledge to build 1.5m homes in the next 5 years. Fundamentally, in order to achieve these targets we see that radical change is required throughout the whole process to make it more efficient to allow construction activity to start earlier. We will continue to support the industry through engagement with industry bodies in a constructive manner, hopefully playing our part in making positive industry changes to target the continual shortfall of housing across the United Kingdom.
Our long-term strategy continues to be that of developing strategic land interests and convert them into consented sites.
Following the year end, the successful planning consents achieved on a number of large housing developments allow the continued throughput of stock in a consistent and well managed basis. Of these sites the group has forward sold 106 plots, being the single largest contract ever entered into and construction is well under way. This will allow us to maintain our strong cash position allowing us to be resilient to any adverse macro- economic changes.
The directors are confident of the prospects of the group will continue and will adapt to ever changing challenges as they present themselves.
As with any business, Pennyfarthing faces risks and uncertainties in the course of its operations. It is only by timely identification and effective management of these risks that we are able to deliver our strategy and grow the business.
The board have considered the prospects of the company and have taken into account its current financial position and its principal risks. Fundamentally, these arise from the deterioration of the health of the UK economy, brought about by uncertainty, loss of consumer confidence, higher interest rates and increasing unemployment, leading to decreased affordability, reducing demand for housing and falling house prices.
The main activities of the group is that of building and development of private dwelling houses for sale. With this comes the potential risks such as:
The adverse effects on consumer confidence could significantly impact the demand for new homes resulting in lower revenues and profits. Continually monitoring supply and demand trends as well as forward looking forecast will allow the Group to navigate any challenges it may face.
Economic and political uncertainty is always going to present challenges. Whether that is at a global or local level it will always be difficult to plan ahead. The impact of a change in Government on the industry is yet to be fully understood. However, whilst ambitious targets for housing is welcomed, delivery on the ground will not be achieved unless positive, hard hitting change is made quickly to all aspects of house building. Furthermore, government policy on taxes, inflation and spending will all play its part on the sector.
The cost of servicing a mortgage remains a risk to the business particularly as interest rates have risen in recent times to tackle inflation, making affordability one of the fundamentals of buying houses. The majority of house sales are bought using mortgages to finance the purchase. Whilst mortgage rates are at higher rates than the last decade we are starting to see some settling down of rates. The impact of the Bank of England rate charges in the coming months and years will play an important role in consumer confidence.
Since 2022, borrowing rates have been rising markedly and have a significant impact on the group as funding costs become more expensive making development project less profitable or in some cases unviable.
Continuing to operate best practice with our Health and Safety to best protect those on potentially dangerous construction sites is of paramount importance to us. Any legislative changes to these practices would filter through our external advisors to all relevant personnel via tool box talks, site inductions and formal training sessions. Employee wellbeing and mental health is particularly important in the construction sector and is regarded as one of the highest sectors of sufferers. Employee wellbeing is integral to ensuring the workforce have a safe, enjoyable environment to work in and the intangible benefit of this is a more effective workforce
Material cost inflation and supply have seen prices escalate in recent years with the advent of a number of global factors causing economic volatility and demand. Prices are starting to stabilize although we are not seeing any evidence yet of a reduction in prices. Locking in prices on a long-term basis is proving difficult as the overall supply chain itself wrestles with uncertainty. This uncertainty is also leading to a worsening of credit terms when exploring new suppliers so continuing and leveraging existing relationships are paramount.
In October 2023, the UK Trade Skills Index estimates that in light of an aging construction workforce, coupled with decreasing apprenticeship intake and the Brexit leakages, an additional 1 million workers will need to be found over the next decade to meet demand. The tight labour market, cost of living crisis and increases in National Minimum Wage are all driving higher wages in the sector. Being able to attract and retain high calibre employees to meet the demands of the business as it grows is of paramount importance. As the business grows, the demands and skillsets of individuals need to change to cater for ever changing dynamics of the house building industry. Training and recruitment alongside other factors such as remuneration are constantly reviewed and monitored to ensure the group remains competitive when attracting and retaining staff. Employee engagement and feedback sit alongside our recruitment and retention processes.
Planning consents remain challenging with local authorities struggling with resource constraints coupled with demonstrating nutrient neutrality on development sites. Issues surrounding Nitrates flowing into the Solent and Phosphates into the River Avon has been a challenge for all development areas affected, practically grinding planning permissions to a halt. Buying into third party schemes has provided a much needed solution in relation to Nitrates. We have resolved the Phosphates problem by being one of the first in the UK to create a strategic Phosphate mitigation scheme.
Given the straightforward nature of the business, the directors are of the opinion that an analysis using KPI's is not necessary for an understanding of the development, performance or position of the company.
The company is funded by a mix of retained earnings and group funding.
Long term and short term cashflow forecasts are prepared and monitored ensuring the company has adequate funds in place to meet its working capital requirements.
The Group have a proud track record of paying suppliers on time and this has resulted in existing suppliers offering further credit terms supporting the future growth of the company. There is certainly more caution amongst new suppliers with more onerous due diligence undertaken before on-boarding. Payment terms are currently 30 days from the end of the month.
In addition, should the business fail to adhere to the stringent demand of the regulatory planning and technical requirements there is the potential for increased costs, disruption and reputational damage which all potentially have financial impacts. Constant review of the planning cycle, keeping up to date with regulatory or technical changes through on-going training as well as planning for at least 3 years ahead help mitigate these impacts.
Health and Safety
The company places particular emphasis on the health and safety of its employees, subcontractors, customers and others on its sites during the construction process strives for zero accidents through an improving safety culture.
Environment
Evolving environmental regulations with an emphasis on sustainability presents challenges and in many cases leads to increased cost and margin erosion. However, taking Corporate responsibility seriously, all companies and staff within the business and wider group are encouraged to be environmentally aware and committed to environmental improvements. The business continues to focus on environmental improvements in the design of its developments and dealing with waste. In addition, the group's housing developments have to provide Biodiversity Net Gain (BNG) which is a concept proposed in the 25 Year Environmental Plan and mandated as a condition of planning permission in the 2019 Environmental Bill. BNG requires a 10% increase in biodiversity after development, compared to the level of biodiversity prior to development taking place. Also and specific to the geographical area in which we develop some of our developments in the Solent catchment area are required to provide nitrate neutrality and within the Avon River catchment phosphate neutrality. Furthermore, the Company continues to deliver Alternative Natural Recreational Greenspace (ANRG) and Suitable Alternative Natural Greenspace (SANG) as part of our developments. Such new public open spaces are intended to mitigate impacts of additional population on protected habitat sites (including the New Forest and Dorset Heathlands) by providing alternative recreation and dog walking opportunities to reduce pressure on protected sites. They provide a health and wellbeing benefit for our residents, being closely located to our developments and a wider resource and benefit for existing communities where we are delivering new homes. Further funding, towards strategic habitats mitigation infrastructure delivery, is also typically secured from our developments.
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 January 2024.
No dividends will be distributed for the year ended 31 January 2024.
No ordinary dividends were paid. The directors do not recommend payment of a final dividend.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The Group has chosen in accordance with Companies Act 2006, s. 414C(11) to set out in the groups Strategic Report information required by Large and Medium-sized companies and Groups (Accounts and Reports) Regulations 2008, sch. 7 to be contained in the Directors’ Report. It has done so in respect of future developments
This report has been prepared in accordance with the provisions applicable to companies entitled to the medium-sized companies exemption.
Basis for opinion
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Other information
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to
report that fact.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our audit:
the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
Based on our understanding of the company and industry, we identified that the principal risks of non-compliance with laws and regulations related to breaches of UK regulatory principles, such as those governed by the relevant construction authorities. We also considered the laws and regulations which have a direct impact on the financial statements such as the Companies Act 2006.
We evaluated management's incentives and opportunities for fraudulent manipulation of the financial statements (including the risk of override of controls), and determined that the principal risks were related to management bias in accounting estimates and judgmental areas of the financial statements.
Audit procedures performed by the audit engagement team included:
Discussions with senior management, including consideration of known or suspected instances of noncompliance with laws and regulations or instances of fraud;
Identifying and testing journal entries based on risk criteria;
Designing audit procedures to incorporate unpredictability around the nature, timing or extent of our testing;
Testing transactions entered into outside of the normal course of the company's business;
Reviewing any potential litigation or claims against the entity which indicate any potential noncompliance issues.
There are inherent limitations in the audit procedures described above. We are less likely to become aware of instances of non-compliance with laws and regulations that are not closely related to events and transactions reflected in the financial statements. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or though collusion.
The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud, is detailed below.
We obtained an understanding of the legal and regulatory frameworks that are applicable to the company and determined that the most significant frameworks which are directly relevant so specific assertions in the financial statements are those that relate to the reporting framework (UK GAAP and the Companies Act 2006) and the relevant tax compliance regulations in the UK.
We understood how the company is complying with those frameworks by making enquiries of management and those responsible for legal and compliance procedures. We corroborated our enquiries through review of board minutes and discussions with those charged with governance.
We assess the susceptibility of the company's financial statements to material misstatement, including how fraud might occur, by discussion with management from various parts of the business to understand where they considered there was a susceptibility to fraud. We considered the procedures and controls that the company has established to prevent and detect fraud, and how these are monitored by management, and also any enhanced risk factors such as performance targets.
Based on our understanding, we designed our audit procedures to identify any non-compliance with laws and regulations identified in the paragraphs above.
We also performed audit work over the risk of management override of controls, including testing of journal entries and other adjustments for appropriateness, evaluating the business rationale of significant transactions outside the normal course of business and reviewing accounting estimates for bias.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at: http://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Use of our report
This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.
The profit and loss account has been prepared on the basis that all operations are continuing operations.
Pennyfarthing Construction Limited is a private company limited by shares incorporated in England and Wales. The registered office is Pennyfarthing House, South Drive, Ossemsley, New Milton, Hampshire, England, BH25 5TL.
The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £.
This company is a qualifying entity for the purposes of FRS 102, being a member of a group where the parent of that group prepares publicly available consolidated financial statements, including this company, which are intended to give a true and fair view of the assets, liabilities, financial position and profit or loss of the group. The company has therefore taken advantage of exemptions from the following disclosure requirements:
Section 7 ‘Statement of Cash Flows’: Presentation of a statement of cash flow and related notes and disclosures;
Section 11 ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instrument Issues: Interest income/expense and net gains/losses for financial instruments not measured at fair value; basis of determining fair values; details of collateral, loan defaults or breaches, details of hedges, hedging fair value changes recognised in profit or loss and in other comprehensive income;
Section 26 ‘Share based Payment’: Share-based payment expense charged to profit or loss, reconciliation of opening and closing number and weighted average exercise price of share options, how the fair value of options granted was measured, measurement and carrying amount of liabilities for cash-settled share-based payments, explanation of modifications to arrangements;
Section 33 ‘Related Party Disclosures’: Compensation for key management personnel.
The financial statements of the company are consolidated in the financial statements of Pennyfarthing Developments Limited. These consolidated financial statements are available from its registered office,
Other financial assets, including investments in equity instruments which are not subsidiaries, associates or joint ventures, are initially measured at fair value, which is normally the transaction price. Such assets are subsequently carried at fair value and the changes in fair value are recognised in profit or loss, except that investments in equity instruments that are not publicly traded and whose fair values cannot be measured reliably are measured at cost less impairment.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire or are settled, or when the company transfers the financial asset and substantially all the risks and rewards of ownership to another entity, or if some significant risks and rewards of ownership are retained but control of the asset has transferred to another party that is able to sell the asset in its entirety to an unrelated third party.
Derivatives, including interest rate swaps and forward foreign exchange contracts, are not basic financial instruments. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of derivatives are recognised in profit or loss in finance costs or finance income as appropriate, unless hedge accounting is applied and the hedge is a cash flow hedge.
Debt instruments that do not meet the conditions in FRS 102 paragraph 11.9 are subsequently measured at fair value through profit or loss. Debt instruments may be designated as being measured at fair value through profit or loss to eliminate or reduce an accounting mismatch or if the instruments are measured and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy.
Financial liabilities are derecognised when the company’s contractual obligations expire or are discharged or cancelled.
Hire purchase and leasing commitments
Assets obtained under hire purchase contracts or finance leases are capitalised in the balance sheet. Those held under hire purchase contracts are depreciated over their estimated useful lives. Those held under finance leases are depreciated over their estimated useful lives or the lease term, whichever is the shorter.
The interest element of these obligations is charged to profit or loss over the relevant period. The capital element of the future payments is treated as a liability.
Preparation of the financial statements requires the directors to make significant judgements, estimates and assumptions. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and associated assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised where the revision affects only that period, or in that period and future periods where the revision affect both the current and future periods.
The main accounting estimates are:
Depreciation - the group establishes a reliable estimate of the useful lives of tangible fixed assets.
Investment property valuation - The group establishes a reliable estimate of the market value of investment properties based on internal valuations and the directors expertise in this area.
Land stock values - The company establishes a reliable estimate of the market value of the land which it holds in stock for future development and provides for any loss in value based on internal valuations and the directors expertise in this area.
Assessment of costs to complete - This involves estimating final development costs and selling prices and impacts profit recognised in allocating costs to sales completions before and after the year end.
Accrued costs - involving a degree of estimation uncertainty in respect of final account settlement.
The average monthly number of persons (including directors) employed by the company during the year was:
Directors' remuneration is borne by the another group entity and disclosed in those financial statements.
The actual (credit)/charge for the year can be reconciled to the expected charge for the year based on the profit or loss and the standard rate of tax as follows:
The net carrying value of tangible fixed assets includes the following in respect of assets held under finance leases or hire purchase contracts.
Hire purchase contracts, which are secured debts, are included within creditors at £194,367 (2023: £4,758).
The following are the major deferred tax liabilities and assets recognised by the company and movements thereon:
The company operates a defined contribution pension scheme for all qualifying employees. The assets of the scheme are held separately from those of the company in an independently administered fund.
During the year the company entered into the following transactions with related parties: