There are compelling reasons why it would be unwise to buy shares in housebuilders at present – however cheap they may seem.
The list of reasons includes forecasts that the property market will weaken as incomes are squeezed by higher food costs and fuel bills, and further interest-rate rises.
Surging inflation continues to drive up housebuilders’ energy, labour and materials costs. Such overheads were relatively stable until the middle of 2021.
As safe as houses: If you are minded to take a gamble on the emergence of an economic rebound in 2024, it is possible to take a more sanguine view of the sector’s prospects
But, if you are minded to take a gamble on the emergence of an economic rebound in 2024, it is possible to take a more sanguine view of the sector’s prospects.
Much of the bad news may already be reflected in the shares – which may be why the consensus of analysts rates both Barratt and Persimmon a buy.
The weakening property market is a reminder that housebuilders’ shares are cyclical stocks, dependent on the fortunes of the economy. It is also a warning sign. Darius McDermott, of online fund research centre FundCalibre, comments: ‘Housebuilders’ margins will be under pressure if they have to cut the price of homes – and profits can very quickly disappear in this industry.’ There is more. Help to Buy, a boon to the sector since 2013, is ending next March, and housebuilders’ total liability for cladding remediation is yet to be quantified, amid shifts in government policy. The souring of housebuilders’ relationship with ministers over cladding has exacerbated share price declines.
Barratt, a £4.2billion group, has tumbled by 46 per cent this year, while Persimmon, whose market capitalisation is £4.6billion, is down 50 per cent. The shares were hit yesterday by a particularly gloomy prediction for the sector from HSBC.
As this column pointed out in April, smaller developers cannot deliver enough houses to turn Generation Rent into Generation Buy and so attract younger voters. Liz Truss has pledged to rip-up planning red tape, ‘turbocharging development’.
But if the new government is to meet this goal – against the background of ingrained nimbyism – it must mend its links with housebuilders, finding a solution to the cladding issue.
Some leading investors believe it is the sector’s moral responsibility to end this scandal.
Savills and others may be forecasting house price falls in 2023. But Savills contends the removal of the most stringent loan affordability tests should, in theory, enable more people to move.
There are many affluent homebuyers who have equity in their properties and substantial savings. Estate agency Hamptons is forecasting that mainstream housebuilders may diversify into premium new builds designed for this clientele to compensate for Help to Buy’s withdrawal.
Meanwhile, the direction of interest rates matters little to the 54 per cent of households who own their homes outright – without a mortgage. The recent results of housebuilders suggest that the deepening of the British attachment to property that took place during the pandemic may be a lasting phenomenon. For example, Persimmon’s half-year results revealed a robust forward order book, with 90 per cent (10,542 homes, worth £2.32billion) sold.
McDermott points to other positives. The housebuilders have huge amounts of net cash, he says, and the shares also look ‘extremely cheap’. Another lure is the dividend yields on offer, although pressure on margins will constrain this generosity in future. Persimmon’s yield is 16.47 per cent, against 3.81 per cent average for the FTSE 100.
But if you continue to be sceptical about the appeal of housebuilders’ shares at present, you should probably check whether you are holding these stocks through funds and investment trusts. It is a good routine practice to discover where your cash is actually invested. Among the funds backing housebuilders is Abrdn, which owns most of the big names in its funds and trusts. Aberdeen Standard Equity Income holds Vistry, for example. Jupiter UK Dynamic, which has a stake in Persimmon and Man GLG Income, and Undervalued Assets, which invests in Bellway.
Columbia Threadneedle holds Berkeley in its Universal MAP (Multi-Asset Portfolio) funds – because its business model is differentiated from the rest of the sector. The company specialises in the regeneration of big brownfield sites in London and the surrounding areas, where the supply of new homes is under half the amount needed. The challenges facing consumers and housebuilders mean putting money into this sector now is a high-risk flutter.
It is a leap of faith in recovery – and also in the political will – to deliver more homes. The obstacles on the way are numerous, but not necessarily immovable.
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