Can this housebuilder stand firm in a shaky housing market? – Fidelity International

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Published 9 September 2022
Fidelity International

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
THE housing market is showing signs of slowing, according to the latest data from housebuilder Barratt Developments, which doesn’t bode particularly well for investors.
Noting “significant macroeconomic uncertainties”, Barratt said the appetite from buyers was clearly dulled, with reservations falling, week on week, and now below pre-pandemic levels. Last year’s revenue to the end of June at £5.3bn was almost 10% higher than the previous 12 months and adjusted pre-tax profits rose 15% to £1.1bn. However, having earmarked hundreds of millions of pounds to fix buildings caught up in the safety crisis, non-adjusted basis profits fell 21% to £642 million.
The impact of the economic uncertainty that has gradually crept into the foundations of the housing market is now evident. The cost of living has risen, along with interest rates, making mortgages more expensive. Now, with the threat of recession looming large and placing a question mark over the jobs market in the medium-term, the ‘heyday’ of the pandemic when the rush for outside space and the stamp duty holiday saw sales and prices soar, has come to a definite end.
Recently, HSBC published analysis predicting house prices in London could fall by as much as 15%, which sent all the housebuilders’ shares falling. The research forecasts that demand for UK housing will fall 20% from this autumn and that average UK house prices will fall 7.5% outside London, and twice that in central London. For new build homes, the research forecasts a 5% drop. HSBC analysts now expect earnings before interest and tax at the UK’s biggest listed builders to fall by between 32% and 53% – an average of 43% – by 2023-24 compared with 2022.
And while the latest Halifax survey shows that house prices have so far proven to be pretty resilient so far, an easing of buyer demand from the likes of Barratt, suggests a likely slowdown in the market is most likely underway already.
We can probably expect to hear more of the same when Redrow posts its full year results on Wednesday (14 September). Having initially started out as a commercial developer, it began building houses in 1980 and is now one of the largest housebuilders in the UK.
It is affected by the exact same supply and demand issues as the likes of Barratt and it too has had its issues. Since the Competition and Markets Authority (CMA) investigation into the ground rent clauses of housing developer Taylor Wimpey, a further four national property developers – one of which is Redrow– have also agreed to work with the companies that purchased their freeholds to prevent “unfair” doubling of ground rent charges on their homes.
However, Redrow should be well-placed to withstand a decline. While short-term volatility is to be expected, it’s important to remember that demand for homes still outweighs supply and if interest rates were to stabilise sooner rather than later, the dip in the housing market could be shorter-lived than feared.
It’s also worth noting that housebuilders are popular with income seekers for good reason, with their generally steady – although of course never guaranteed – dividends.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Funds in the property sector invest in property and land. These can be difficult to sell so you may not be able to sell/cash in this investment when you want to. There may be a delay in acting on your instructions to sell your investment. The value of property is generally a matter of a valuer’s opinion rather than fact. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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