Interactive Investor

Where next for the housebuilding recovery?

25th April 2023 13:06

by Graeme Evans from interactive investor

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Property prices have been resilient, but with key players in the housebuilding sector about to post updates can shares continue their recovery?

Houses beside a green arrow showing house price growth 600

Santander’s forecast for house prices to fall 10% this year in a return to 2021 levels today cast a cloud over housebuilding stocks ahead of updates by the sector’s big three players.

High street lender Santander’s gloomy guidance also pointed to the potential for interest rates to peak at 6% as the Bank of England fights a stubborn inflation scenario.

The update, which did little for shares in Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG), also revealed a 37% fall in first-quarter mortgage applications as higher borrowing costs dent demand.

Investors in the housebuilding sector will be hoping that such forecasts are already factored into prices after seeing leading players lose more than 50% of their pre-pandemic values.

Shares in all the major builders apart from Persimmon (LSE:PSN) have improved in 2023, however, lifting by 21% on average since October’s lows due to recent signs of resilience for house prices and the wider UK economy.

UBS continues to have “buy” ratings on Barratt Developments (LSE:BDEV), Bellway (LSE:BWY), Berkeley Group (LSE:BKG), Redrow (LSE:RDW) and Taylor Wimpey (LSE:TW.), believing that the chances of a house price correction of more than 10% now looks less likely.

However, the bank’s analysts still expect volumes to decline in the region of 20% on average across the sector, albeit with sales rates sequentially recovering.

They also forecast a squeeze in sector margins from 20% in 2022 to 13% in 2023-24 due to operational leverage, build cost inflation and the pick-up in sales incentives.

The Swiss bank added: “The key question from here is whether the housing market (both in terms of prices and sales rates) recovers. The risk is further downside to house prices and elevated build cost inflation remaining sticky.”

Its comments come as the three biggest players prepare to issue trading updates, starting with Persimmon tomorrow followed by Taylor Wimpey on Thursday and Barratt on 3 May.

UBS expects year-to-date private sales rates will have picked up to around 0.60 per site per week from 0.30 in the fourth quarter and 0.5 when the sector last reported in February and early March.

UBS added: “Key will be the outlook for cost inflation and pricing, where a meaningful gap in guidance/opinions has opened up across the space.”

The bank’s forecasts point to significant annual profit declines at Persimmon of 65% to £354 million and 59% to £372 million for Taylor Wimpey. At Barratt, a June year end means the bank sees profits dropping to £546 million in 2024 from around £880 million this year.

UBS adds that the political backdrop remains challenging for the sector, with recent planning policies having the potential to drive up land prices. Investors will also need to consider the likelihood of a general election in 2024.

According to research by the bank, total shareholder return performance is typically strongest in the six months prior to the election date before a relatively mixed performance in the period following elections. Historically relative performance for the sector has been stronger following a Conservative government being elected.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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