Depressed valuations and difficulties in getting shovels in the ground could lead to more bids for both the UK’s listed housebuilders and builders’ merchants, as private equity (PE) groups target weakened sectors.
Housebuilders with plenty of sites ready to go are even more attractive, given UK demand for houses is not going away. Discounts remain steep in the sector, at the same time as portfolio valuations are trending down. The value of private housing projects starting on site fell by 23 per cent in the three months to April and were 51 per cent lower than the same period a year ago, according to data provider Glenigan.
Although the value of detailed planning approvals rose by 20 per cent on the previous year, this was driven by approvals for a handful of major schemes. Underlying approvals (for projects worth less than £100mn) were 22 per cent lower than the prior-year period.
House completions also remain well short of the government’s 300,000-a-year target – last year, 191,801 homes were built, according to the National House Building Council. The Labour Party is mulling a number of measures to fix this, should it come to power, including reforms to the way in which land is bought through compulsory purchase orders to discount potential planning gains, according to the Financial Times. It is also proposing to build more homes on green belt land.
Although some housebuilders “haven’t put enough land into the machine” after pausing purchases during the pandemic, even those with large land banks struggle to bring enough sites to market given planning system constraints, said Clyde Lewis, an analyst at Peel Hunt.
Home bargains
Housebuilders who therefore have detailed planning consents to progress schemes will become attractive to potential bidders, especially as many look undervalued.
Barratt Developments (BDEV) shares currently trade at a 17 per cent discount to their book value, Bellway (BWY) shares are discounted by 20 per cent and Vistry (VTY) shares by 22 per cent. Crest Nicholson (CRST) shares trade at a discount of almost 30 per cent.
And the industry is no stranger to private equity interest. Of the 17 significant deals involving housebuilders since 2019, seven have been private equity buyouts, according to Peel Hunt. By contrast, only three takeovers have been carried out by listed companies.
An optimistic take is that the housing market will quickly rebound, pushing up share prices again. Goodbody analyst Shane Carberry said housebuilders’ sales rates plunged by 60 per cent in the final quarter of last year after Kwasi Kwarteng’s disastrous "mini" Budget, which led to interest rate hikes and the temporary withdrawal of many mortgage products from the market. Although they still face a tough year – Carberry expects sales volumes to be around 30 per cent lower this year – confidence and mortgage availability have improved.
For instance, there were initial fears that falling prices would force housebuilders to record impairments to the carrying value of their land banks, but this now seems “unlikely”, Carberry said.
Housebuilders’ shares sold off again last week, as higher-than-anticipated inflation data triggered fears of a further interest rate rise from the Bank of England, but Carberry said the overall stability of the interest rate environment was more important than rates edging slightly higher.
And for the PE firms that are already invested in UK housebuilding, “I doubt anything will really have changed in terms of the reasons why they bought into the sector in the first place”, Peel Hunt’s Lewis said.
Supply remains an issue
Housing supply is still running well short of demand, as demonstrated by the fact that UK rents rose by 4.8 per cent in the 12 months to April. Rents in London grew by 5 per cent in that period – the quickest pace in more than a decade, according to the Office for National Statistics.
Any improvement in demand for new homes would be welcomed by the wider industry, with builders’ merchants’ shares having endured a torrid couple of years as inflationary pressures also weakened demand in the home improvements market.
Marshalls (MSLH) shares currently trade 66 per cent below their two-year high, while Wickes (WIX) and Travis Perkins (TPK) shares are 56 per cent and 51 per cent lower, respectively, than their peaks over the same timeframe.
However, despite dire forecasts from the Construction Products Association of a 6.4 per cent contraction in output this year, with private housing activity to shrink by 17 per cent, earnings in the sector have largely held up, Carberry added.
Private equity has been active in this market, too – either through buying divisions from listed firms or taking stakes in them – Clayton Dubilier & Rice (CD&R) currently owns 28.9 per cent of insulation specialist SIG (SHI).
“I’m surprised we haven’t seen more private equity interest. The cost of debt for them at the moment is obviously making life a little more challenging... but it’s definitely a theme to follow in 2023,” Carberry argued.
Lewis sees Crest Nicholson as the most vulnerable housebuilder to a potential bid, given its lowly valuation and small size. Redrow (RDW) shares’ 16 per cent discount to book value could also make it a target, although founder Steve Morgan’s 17 per cent stake gives him sway.
For the merchants, CD&R’s stake in SIG raises the potential for an outright bid. Potential buyers might also see value in Travis Perkins, given that the book value of its property portfolio is only around half of its market value of about £1bn, according to Peel Hunt.
