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Strong housebuilder updates get muted market reaction

Despite concerns around costs and interest rates, sector bulls can still make a good argument
Strong housebuilder updates get muted market reaction
  • Barratt, Persimmon and Redrow among companies to report
  • Sales and demand rise, though costs are climbing

Throughout June, shares in UK housebuilders were on the slide as signs of rising inflation sparked worry among investors that interest rates could climb faster than expected. Those concerns are yet to fade, judging by the tepid reception to positive trading updates across the sector in the past fortnight.

Persimmon (PSN), the largest listed player, captured the big theme when it said that sales in the six months to June had been ahead of comparative periods in both 2020 and 2019. Management told shareholders that house price growth had mitigated a rise in input costs, a trend it expects to continue over the coming months.

That pushed revenue up to £1.84bn for the period, leading the group to accelerate the distribution of surplus capital equivalent to 110p a share. Previously, this was scheduled to be paid in two instalments this year. Now it will be awarded in one chunk on 13 August to shareholders on the register on 23 July.

This followed a full-year trading update from Flintshire-headquartered Redrow (RDW), which reported a rise in revenue per outlet per week from £259,000 to £288,000. Sales were apparently unaffected by a reduction in buyers’ use of the Help to Buy scheme, which tapered to 13 per cent of private reservations in the six months to June, compared with half of all transactions in the same period in 2020.

Operating margins, which fell to 11.1 per cent a year ago, are also on the up. They are expected to exceed 15.5 per cent when the group publishes full accounts in September, and climb to around 18 per cent thereafter. Prior to the pandemic, they were at 19.5 per cent.

Peer Vistry (VTY), formerly known as Bovis Homes, also saw margin improvements in both its housebuilding and partnerships arms, and management is confident consensus expectations for pre-tax profits of £329m can be met this year. Again, there was an assurance that house price inflation is “more than offsetting any cost pressure”, and that some industry-wide supply chain bottlenecks will ease in the coming months.

The company added that it has already secured bookings on 93 per cent of the homes it expects to build in 2021. That suggests buoyant demand for new housing stock will continue after the end of the stamp duty holiday on the first £500,000 of a property’s purchase price.

These updates appear to bear out a survey taken by the Nationwide in April, which found that a quarter of homeowners were considering moving or in the process of moving. Analysts at Liberum argue that this suggests current demand is structural rather than a lockdown-induced fad, given that only around 5 per cent of housing stock trades each year.

In general, house price inflation for new homes has also been much lower than the 10 per cent reported across all properties. But some housebuilders have seen sharper price spikes than others. Despite its focus on lower-cost, affordable housing, MJ Gleeson’s (GLE) homes division saw a 11.4 per cent increase in the average selling price to £145,800 for the 12 months to June. This failed to stop an 18.5 per cent improvement in sales versus 2019.

This week, Barratt Developments (BDEV) also confirmed it had beaten its 2019 sales figure, after completions shot up to 17,243 in its half-year to June. The company now expects statutory pre-tax profits for the period to come in “at the top end” of an analyst forecast range of £761m to £812m.

In keeping with other updates, the market’s reaction to the profit upgrade was nevertheless muted, after Barratt warned that cost inflation could creep up from 2 per cent to between 3 and 4 per cent. Management also expects provisions for remedial fire safety works on its legacy properties to climb from £51m to £81m this year. “Estimates may have to be updated,” management added, somewhat ominously.

While the final bill for the cladding scandal is unquantifiable, the outlook for the sector remains strong on several fronts.

First, high barriers to entry mean the sector’s incumbents can acquire land cheaply. Second, a shortage of supply and government incentives all but guarantee strong demand. Third, despite a big rise in house prices, mortgage payments remain affordable against average post-tax income for properties outside of London – which is where the listed housebuilders make most of their money.

Fifth, though pricier overheads are a threat to margins, investors should remember that labour makes up around 60 per cent of build costs. A rise in wage inflation should not be ruled out, though ironically higher salaries could push up house prices further as banks adjust the amounts – if not the multiples – under which they can lend.

“Fund managers typically sell housebuilders on rising rates, but the impact on affordability is not material,” wrote Liberum in a recent note, estimating wage inflation would only need to rise by 1 per cent a year to 2025 to offset the effect a 100-basis point interest rate hike would have on mortgage payments. Don’t write off this cash cow just yet.

CompanyTIDMPrice (p)Market cap (£m)12-month total return (%)Fwd PELast IC ViewLatest update
Barratt Developments BDEV7037,09629.8%11.8Hold, 782p, 6 May 202114-Jul
Countryside Properties CSP509.52,62938.4%14.4Hold, 496p, 13 May 20217-Jul
MJ GlessonGLE87250828.6%85.1Buy, 769p, 11 Feb 20219-Jul
Persimmon PSN2,9699,51921.9%13.2Hold, 2,804p, 3 Mar 20218-Jul
Redrow RDW6382,19238.4%9.3Buy, 663p, 27 May 20217-Jul
VistryVTY1,1912,65167.9%9.7Buy, 943p, 4 Mar 20217-Jul
Source: Investegate, FactSet