- Weaker sales and outlooks across the board for housebuilders
- But long-term demand remains high given the UK's housing struggles
New home sales have crashed. This week, Barrett Developments (BDEV) reported a 30 per cent slide in forward sales volumes in the first quarter of its financial year and said it expects deliveries to be 17-23 per cent lower than a year earlier. A day before, Bellway (BWY) had said it expects completions to fall by more than 30 per cent, citing a slide in orders.
Yet, given the massive undersupply of homes in the UK and the political will being expressed by both major parties to fix this, there is a case to be made that the medium-term outlook for the sector looks much better than current valuations imply.
Both Bellway and Redrow (RDW) trade at prices lower than they were during the global financial crisis relative to their book values, despite being much less risky prospects than they were back then, according to RBC Capital Markets analyst Anthony Codling. Bellway shares are currently priced at just 0.74 times their tangible net asset value, which is below the industry average of 0.81 times, according to broker Peel Hunt.
“We believe that the market is concerned about Bellway’s London exposure and its cladding/fire safety provisions,” Codling said.
Although Redrow is pulling back from the London market, it still has a large site at Colindale and is also suffering due to its exposure to the capital's more inflated market, where pain will be more acutely felt if prices continue to decline. London house prices are 84 per cent higher than the national average, according to the Office for National Statistics.
Investec analysts forecast a 63 per cent decline in earnings for Bellway next year, moving its valuation from a trailing price/earnings (PE) ratio of 6.6 times to a leading PE of 16. They also forecast a 55 per cent slump in Redrow’s earnings.
However, Codling said that fears about both companies are overblown. “Bellway has a very strong track record of delivery and arguably Redrow’s homes appeal to the equity-rich homebuyer who is less sensitive to changes in mortgage rates and cost of living increases,” he said.
Both companies are also in much better shape than they were at the height of the 2008-09 financial crisis, when housebuilders accustomed to years of booming markets borrowed heavily to build up land banks, only to face huge losses and painful deleveraging when land values were impaired.
A softer landing?
This time around, there haven’t been any significant hits to land values. House prices, although declining (by 4.7 per cent in the year to September, according to Halifax) have held up reasonably well, and housebuilders’ balance sheets are much more robust, said Shane Carberry, an analyst at Goodbody.
“If your thesis on the sector is that there is not going to be any significant declines in house prices and the price of land remains relatively stable… then the stocks look cheap trading at such a significant discount to book [values],” Carberry said.
This clearly isn’t a given. House price sentiment among property valuers last month was the most bearish since February 2009, according to the Royal Institution of Chartered Surveyors, with many highlighting a continued gap between sellers’ and buyers’ price expectations.
Yet the 25 per cent increase in house prices between February 2020 and September 2022 means “there is still a significant amount of Covid equity in house prices”, Codling said.
The medium-term outlook also remains strong given the chronic undersupply of housing in the UK and the pledges made by the two main political parties to fix this. Labour leader Keir Starmer promised to build 1.5mn homes within five years of being elected during his conference speech last week, while the government last month pledged £1.1bn in endowments to help regenerate 55 towns, promoting more housing within centres.
Codling said that although housebuilders’ returns on tangible equity will slip to “single-digit” percentages this year, they should bottom out by the middle of next year and return to double figures by 2025.
Over the long run, he argues that they should be able to surpass the 20 per cent peak achieved after the introduction of the government’s Help to Buy scheme in 2013, given that returns are driven more by operating margins than financial leverage.
“Generally, all of the builders remain in a very sound position from a balance sheet perspective,” Carberry said. Most are not only debt-free but have “significant net cash” that could be deployed either to buy more land if prices are weak or be returned to shareholders if market conditions improve.
“I still think the sector does offer value from a medium-term perspective, but there are clearly short-term headwinds,” he said.
