Will housebuilders continue to outperform expectations?

Analysts upgraded earnings forecasts for a trio of major housebuilders after they reported a sharp recovery in completions since the summer and strong reservation rates. 

Barratt Developments (BDEV), Bellway (BWY) and Redrow (RDW) attributed record levels of completions to the stamp duty break and a higher level of work in progress following the first lockdown in March. 

Bellway raised expectations for completions during the 2021 financial year to around 9,800, 4 per cent ahead of guidance given in December. The increase in sales volumes should also enable the group to recover a greater proportion of overheads, prompting management to target a 200 basis-point increase on a July underlying operating margin of 14.5 per cent.  

In a bullish signal of future sales volume growth, Bellway made a record first-half investment in land, with the number of plots purchased during the six months to January more than a quarter higher than the same time in the prior year.  

Meanwhile, Redrow said completions rose by a fifth during the final six months of 2020 and the order book stood 8 per cent higher. 

The rebound in completions has also boosted cash balances and improved dividend prospects across the sector. Bellway’s net cash position jumped to £346m and analysts increased dividend forecasts for the year to July to a consensus 97.2p a share. Redrow reinstated the interim dividend at 6p a share, after net cash also rose to £238m from just £14m at the end of 2019. 

For Barratt, the hiatus in land buying earlier last year and scrapping of dividend payments boosted cash balances to almost £1.1bn and also allowed for the reduction of land creditors by more than a quarter to just over £600m, or 21 per cent of the land bank value. 

Consensus forecasts for Barratt and Bellway over the current financial year were increased by 4 per cent and 2 per cent, respectively, and Redrow was also moved up marginally. However, forecasts for larger rivals Persimmon (PSN) and Taylor Wimpey (TW.), who are due to report full-year results during the first week of March, were left broadly unchanged.  

The overriding question is how long will the heady pace of demand continue? The scheduled end of the stamp duty holiday is due to coincide with the restriction of both the help-to-buy scheme to first-time buyers and the imposition of regional price caps. 

House prices fell for the first time in six months in January, according to Nationwide, down 0.3 per cent in December and the rate of annual growth eased substantially. The mortgage lender blamed a tapering of demand ahead of the tax holiday deadline, which could ease further as transactions become less likely to complete before 31 March.

“The help-to-buy is the absolute key area,” said Barratt chief executive David Thomas. “Stamp duty is just an acceleration.” Mr Thomas pointed to a steady rate of completions beyond March – of the forward sales at the end of December, 81 per cent are scheduled for completion after the first quarter. 

Similarly, Redrow chief executive Matthew Pratt said the group had a private forward sold position of £750m, around 70 per cent of which would be attributable to the 2022 financial year. The affordability pressures that could result from the help-to-buy restrictions were less of an issue for the group’s traditional customer base, Pratt argued. “Most of our people will come to us with deposits and have an element of equity,” he said. 

Working in favour of demand continuing is the low cost of mortgage borrowing, which could also help insulate the market from a rise in forced sellers – which would weigh on broader market prices – if the rate of unemployment rises markedly later this year. Knight Frank forecasts flat sales prices this year and a 3 per cent rise in 2022. 

Analysts have pencilled in an annual rise in earnings of 10 per cent or more for Barratt, Bellway and Redrow in 2022. There is undoubted uncertainty over how well demand will hold-up following the tapering of government stimulus. However, that is arguably compensated for by the modest forward earnings multiple of 11 attached to both Barratt and Bellway’s shares and a multiple of just 8 for Redrow. We remain bullish towards all three.