Analysis: What next for UK housebuilders?
By Rob Griffin
12:50, 15 November 2021
Investors in UK housebuilders should be celebrating. The sector has recovered well from the enforced Covid-19 lockdowns and the general outlook appears positive.
However, strong trading and positive earnings results have not been enough to prevent the decline of stock prices of leading companies in this industry over the past six months.
So, what is happening? Here we take a look at the extraordinary situation and ask analysts to pick which housebuilders have the best prospects.
The backdrop
UK housebuilders were obviously badly affected last year by the restrictions imposed to stop the spread of coronavirus, with building sites forced to close in March 2020.
However, the industry has bounced back on the back of a strong demand for houses, fuelled by the property market’s resurgence as restrictions have been lifted.
This has meant the price of an average UK home hitting £250,000 for the first time, according to building society Nationwide – up more than £30,000 since the pandemic began.
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Upbeat results
The feel-good factor has been reflected in the various results announcements and trading updates given by the sector’s leading companies in recent weeks.
Persimmon said it was optimistic about the property market outlook, given good levels of demand, strong mortgage availability and low interest rates.
Bellway, meanwhile, unveiled ambitious plans to increase the number of homes being constructed by around 20% to 12,200 during the 2023 financial year.
Weathering challenges
Housebuilders have also reassured investors that they have been able to combat the well-publicised material shortages and supply chain problems.
Speaking at his company’s annual meeting, Redrow Chair Richard Akers predicted overall build cost inflation would be around 5% for the current financial year.
“We are working successfully with our longstanding supply partners to ensure build output remains at normal levels,” he said.
Stock price falls
However, an analysis of stock price performance by Capital.com shows many listed UK housebuilders have suffered falls over the past six months.
Crest Nicholson, for example, has dropped 17.4% from 420p to 347.2p since 12 May 2021, and Persimmon is down 12% to £27.27. Bellway, meanwhile, has fallen 11% to £31.57.
Elsewhere, Vistry’s stock is trading around £11.48 – 10% below its level six months ago, while the price of Barratt, Berkeley, MJ Gleeson and Taylor Wimpey are around 8% lower.
Why has this happened?
According to Charlie Campbell, an analyst at Liberum, there are a number of reasons why share prices have fallen over recent months.
“Strong trading and estimate upgrades have been trumped by the perceived threats from interest rates, input pressures and shifting government policy,” he said in a report viewed by Capital.com.
However, he argued that this is unfair.
“We believe that all these fears are now past their worst, which should mean that shares can start to perform better again as valuations go back to reflecting the continued strength of company fundamentals,” he said.
Positives and negatives
Campbell’s analysis identified the various themes that could have an impact on the sector over the coming months.
On the positive side, there is ongoing strength in the housing market, low mortgage rates, government support for housebuilding and subdued land costs.
On the negative, meanwhile, sits building material cost inflation, stretched affordability in London, the potential for mortgage rates to rise and future homes costing more to build.
Significant upside
However, Campbell finds significant upside for the sector and points out that expectations of interest rate hikes have moderated since the Bank of England decided to leave them unchanged.
“The outlook for 2022 appears favourable, with high wage inflation expected and the banks showing good lending appetite,” he said. “The sector has tended to do very well in December”.
He also suggested there was anecdotal evidence from trade associations and individual companies that building material cost inflation was moderating. This would be another positive sign.
Top picks
Campbell’s current top sector picks include Persimmon, which he calls a “high-quality business” with sector-leading returns and a strong balance sheet.
“It also has good exposure to first time buyers and low price points, where affordability is best,” he added.
He also likes Taylor Wimpey.
“It has an extremely attractive valuation, which offers an attractive entry point for a self-help story,” he said. “It also offers attractive dividends”.
Read more: MJ Gleeson (GLE) reveals strong demand for low-cost homes
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