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Will the housebuilders' bullish attitude last?

Persimmon and Barratt Developments have warned that sales rates have started to return to more normal levels ahead of the stamp duty break deadline on 31 March
Will the housebuilders' bullish attitude last?
  • Housebuilders reported a sizeable recovery in sales following the introduction of the stamp duty break
  • However, there are concerns the end of the tax holiday, help-to-buy restrictions and whether rising unemployment could curtail progress

Persimmon (PSN) joined peers in unveiling a sharp bounceback in completions during the second half of last year, but warned that the surge in activity induced by the stamp duty break had already begun to slow. 

The largest UK-listed housebuilder reported an annual rise in the average weekly sales rate per site of more than a third during the latter half of 2020, which helped partially mitigate the impact of construction and site closures during the initial lockdown last spring. 

However, sales during the final quarter reverted to more normalised levels, while management said it also recognised “the uncertainties surrounding the potential impact of the pandemic”, particularly around unemployment levels and consumer confidence.

The figures followed bullish updates from rivals Barratt Developments (BDEV) and Vistry (VTY), which prompted analysts to upgrade earnings forecasts for the 2021 and 2022 financial years. 

Barratt Developments increased guidance for completions during the year to June by 750 homes and expects completions to be between 15,250 and 15,750 after completions rose 9.2 per cent during the second half of 2020. 

Meanwhile, Vistry said pre-tax profits for 2020 would come in at the top end of guidance at £140m thanks to a 15 per cent step up in the sales rate during the second half of the year. The housebuilder also said it had forward sold 55 per cent of forecast units for 2021, which should lead to a jump in pre-tax profits to £310m. It plans to reinstate a “modest” final dividend in respect of 2020 after swinging to a net £38m cash position, from net debt of £357m at the end of June. 

The positive update is vindication of targets set at the time of Vistry’s formation last year to boost completions, increase margins and achieve cost synergies, said Goodbody analyst Dudley Shanley. Those goals have been met with scepticism by investors, which is partly responsible for the shares trading at a discount to forecast net asset value (NAV). “The targets at the time of the deal were aggressive,” he said. “The market might be only just starting to buy into believing those targets.”

The surge in demand among buyers looking to complete before the end of the stamp duty break helped push up sales prices by an annual 6 per cent in December, according to the latest Halifax house price index. However, the monthly rise slowed to 0.2 per cent, down on 1 per cent in November.  

The end of the stamp duty holiday and restrictions on the help-to-buy scheme from 31 March are expected to coincide with unemployment hitting its post-pandemic peak, according to forecasts from the Bank of England and Office for Budget Responsibility (OBR), which some anticipate will weigh on housing transaction volumes and sales prices. 

Market forecasters are split on expectations for the direction of home sales prices this year. Real estate services group Knight Frank expects sales prices to be flat this year, before rising by 3 per cent in 2022. However, the OBR has forecast a 3.5 per cent decline in sales prices this year and a 2.6 per cent fall in 2022, before returning to growth in 2023. 

An easing in market conditions would inevitably result in housebuilders slowing the rate of completions, argued independent housing analyst Neal Hudson. “Housebuilders build as fast as they can sell them,” said Mr Hudson. 

A lower level of completions could, in turn, hinder cash generation for housebuilders, which have benefited from ramping up volumes in recent years, and dampen prospective dividend payments. 

The restriction of the help-to-buy scheme to first-time buyers alone and the introduction of regional price caps could also present a challenge to earnings from this year. “We are likely to see a bit of a shift in activity as housebuilders start to build smaller houses to try and get under those caps,” said Mr Hudson. The introduction of conditions linked to build quality for groups looking to qualify for the government scheme could be an additional headwind, he added. 

Yet the extent to which all that uncertainty is reflected in the market valuations of the housebuilders, differs across the sector. A net cash pile of £1.2bn and leading dividend justifies Persimmon’s sector premium valuation. Yet at 2.3 times forecast NAV at December this year, the shares are valued close to the five-year average. Peers such as Bellway (BWY) and Redrow (RDW), which trade at discounts to their historical averages, offer more upside potential.