The first half of the year has been a bit of a mixed bag for the UK’s housebuilders. Brexit uncertainty, regulatory concerns over government loan schemes and a cycle looking long in the tooth have all weighed on shares. However, all housebuilders were not born equal apparently, and with the UK’s departure from the EU seemingly just around the corner, fortunes in the sector are looking increasingly divergent.
In February, while Bellway and Redrow put higher cancellation rates and lower sales down to UK-EU unease, Persimmon bucked the Brexit blues posting profits of £1.1 billion, becoming the first UK company in the sector to reach the milestone.
And while Berkeley reported a 20% fall in pre-tax profits last month, along with an admission that profits in the current year to next April will fall another third, shares in Barratt Developments hit a new high this week after announcing its full-year pre-tax profits will be ahead of expectations, at £910m.
Today’s update from construction and house building firm Galliford Try puts it somewhere in between. The FTSE 250-listed company said it is set to report full year profit before tax in line with analysts’ expectations on 11 September.
Its Linden Homes division, which attracted an ultimately unsuccessful £950m bid from rival Bovis in May, maintained its sales rate and margins as the firm refocuses on producing mid-range family houses and reducing exposure to the slowing London property market. However, the firm has had to cut costs, losing up to 350 staff by the end of this month including infrastructure boss Nick Salt.
What next for the sector?
Housebuilders have been major beneficiaries of the post-crisis low-interest-rate environment and measures like Help to Buy which have arguably been a bigger boost to the industry than to house-buyers. And while the scheme has propped up some of the bigger players with deeper pockets despite a market slowdown, the end of the programme in 2023 could have investors reassessing growth targets and the strength of balance sheets sooner rather than later.
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With most builders using Help to Buy to produce apartments and London accounting for the lion’s share of all housebuilders’ apartment sales, there is also the issue of the capital seeing steady declines in house prices over the past two years.
Investors will need to look at the exposure to this market in their companies and if, like Galliford Try and Barratt have done, they have made clear their intentions to manage the scale of their projects in London. When the crutch is taken away they’ll need to stand on their own two feet.
And then there is the broader issue of the overall economic cycle. Housebuilders normally benefit mostly from early-stage consumer confidence and cheap borrowing rates, hence the rise firms have enjoyed particularly between 2008 and 2015.
Brexit has the sector stranded in no man’s land for the time being and while there may be knock-on effects from any impact on the UK economy from October, investors will need to be wary of the more cyclical narrative at play here.
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