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OPINION

Housebuilders look to batten down the hatches

Housebuilders look to batten down the hatches
February 12, 2019
Housebuilders look to batten down the hatches

Normally, the fortunes of housebuilders are closely aligned to economic performance, and given the huge progress made in the wake of the financial crash and a weakening economy, it would be natural to expect housebuilders to experience much tougher conditions in the months ahead.

However, these are not normal times. The Help to Buy scheme introduced in April 2013 has been the backbone of support for first-time buyers, with these subsidised sales accounting for nearly half of all sales for builders such as Persimmon (PSN). The market has also drawn heavy support from the low interest rate environment, and the fact that employment rates have been running at record levels.

Interim figures from Redrow (RDW) and Barratt Developments (BDEV) both delivered a strong increase in profits and a solid order book. And despite the ongoing Brexit saga, forward order books point to continued growth in demand. However, a note of caution has been creeping into the equation – something that many would call a dose of common sense – given the possibility of a continued weakening in economic growth. In the case of Barratt, this meant that while net cash levels were significantly higher, this reflected the fact that land purchases were cut in half. It also meant that the size of the land bank dropped marginally.

Exceptional items aside, there is certainly growing pressure on margins because shrinking house price inflation has not been matched by a corresponding fall in input costs. In some cases, there has also been a greater use of incentives to tip prospective buyers off the shelf. Even so, Bellway (BWY) reported a slight increase in cancellation rates. On the plus side, revenue growth should continue as more sales sites are opened.

Those companies operating at the higher end of the price range are facing the biggest difficulties, and many have taken steps to focus on lower-priced units. There has also been a shift towards partnership agreements with local authorities and housing associations. This is a win-win situation because local authorities are able to fill their obligations to build a certain number of affordable homes, while builders benefit from a capital-light business model as well as building private homes on local authority land, something that the latter appreciates because of the council tax income. That puts the likes of Countryside Properties (CSP) in a strong position, while Telford Homes (TEF) is a pioneer in the build-to-rent sector, at a time when institutional funds seeking a decent return are being pushed into this sector.

So where do we go from here? There are already signs that the UK economy is starting to show fatigue. Construction output data for the fourth quarter of 2018 revealed that new work consigned to residential construction fell by 6.8 per cent, while 3,000 construction firms went bust in 2018. GDP growth in the fourth quarter fell to just 0.2 per cent, taking year-on-year growth to its weakest level since 2012. And in December GDP actually shrank by 0.4 per cent. The Brexit factor has once again shouldered a lion’s share of the blame for this, but it’s worth noting that growth rates elsewhere are also slowing, notably in Europe, while trade wars and budget controversy are serving to unsettle the US economy.

Housebuilders reported a pick-up in activity after a sluggish start to the year, and valuations have become more attractive following a period of weak share prices. Dividend yields are also strong, while nearly all the main housebuilders have plenty of cash and no debt on the balance sheet if you discount land creditors. All this means that they are much better placed to weather any storm that may result from a messy exit from Europe. Much of the scare-mongering is clearly overdone, but sensibly, there is a greater inclination to batten down the hatches and concentrate where possible on the more affordable end of the market.