FTSE 350: Housebuilders in precarious position

Indeed, the 2016 referendum was followed by a decline in housing transactions and caused an acceleration in the decline in sales prices, which has slowed sales rates and squeezed operating margins for the UK’s housebuilders during the years since the membership vote. 

However, whether the election of a governmental majority – and clearer pathway to Brexit – will kickstart the UK housing market is not assured, particularly if you view slowing house price growth as a cyclical correction rather than a symptom of Brexit uncertainty. Price growth began to stutter prior to the referendum, at the start of 2015, according to data from lender Nationwide. A more prolonged and dramatic reduction in housing transaction volumes puts housebuilders at risk of a fall in the value of land held on their balance sheets. 

The perceived antidote by some housebuilders, including Crest Nicholson (CRST) and Countryside Properties (CSP), has been to shift increasingly away from the private sales market and towards affordable housing. The trade-off of this trend – which looks set to continue this year – has been a rise in sales volumes and return on capital, but lower margins. 

Yet the big question for investors is whether the sector’s largest listed players will be able to maintain the generous dividend payments they have made in recent years. For the sector’s biggest constituents, Persimmon (PSN) and Taylor Wimpey (TW.), there is a degree of scepticism, with the shares offering dividend yields of 8.2 per cent and 8.1 per cent, respectively, after including special dividends. 

Persimmon has committed to maintaining the 225p paid out in 2018 and 2019 this year and plans to pay 110p in 2021. Meanwhile, Taylor Wimpey plans to continue its record of paying special dividends in 2020 by returning £360m, alongside 7.5 per cent of net assets as an ordinary dividend – analysts at Peel Hunt are forecasting a total payout of 18.6p a share for the year. 

With markets betting on a cut to the Bank of England base rate, cheaper borrowing costs could provide a fillip to house buying activity this year. However, following a post-election rally, shares in most housebuilders – with Crest and Countryside Properties the exceptions – are trading at price/net asset value multiples that are above their 10-year historical averages. Those valuations reflect a high level of confidence that house price growth will rebound, something that is far from assured across the country, particularly given affordability problems in London and the south-east.