Persimmon’s [PSN] share price reached a record high of almost 3,300p in February 2020, before halving in a matter of weeks as the spread of Covid-19 rattled investors. By April 2021, the FTSE 100-listed stock was almost back at pre-pandemic levels, but since then has trended downwards to its current price of around 1,884p.
Shares in the housebuilder are down approximately 35% this year, despite strong demand in the UK housing market, as investors worry over growth and rising interest rates. The decline is in line with those of its peers – shares in fellow FTSE 100 housebuilders Taylor Wimpey [TW] and Barratt Developments [BDEV] are down roughly 34% and 39%, respectively.
Ahead of Persimmon’s half-year trading update on Thursday, we look at the factors shaping its share price and consider the company’s prospects.
Investor confidence in UK housebuilders has taken a hit over the last 12-15 months, even as buoyant demand has contributed to UK house price growth of around 10% a year, according to property website Rightmove. The key factors behind the tumbling valuations of the sector’s major players have been concerns over growth, higher interest rates and the bleak economic outlook.
When Persimmon issued its Q1 trading update in April, management said the business was “trading in line with expectations, demand remains strong, our private average sales rates are circa 2% higher year-on-year and we have a robust forward order book of circa £2.8bn” . However, the company also warned that first-half completions were likely to be lower than a year ago, with completions picking up in the second half of the year. This appears to have spooked some investors.
Furthermore, house price growth is expected to slow as homebuyers’ incomes are hit by rising interest rates and a surge in the cost of living. In a fresh bid to tame soaring inflation, the Bank of England raised interest rates by a quarter of a percentage point to 1.25% in June – the fifth rate hike since December.
Consequently, lenders are increasing interest rates on home loans, which is cooling demand among first-time buyers and movers. Estate agents are already reporting a drop in inquiries for new homes, leaving investors wondering whether housebuilders will meet their margin and sales targets.
Despite near-term uncertainties, the bigger picture remains broadly positive. Last year Persimmon made record profits per house of around £66,000, as the average UK selling price rose to £266,000, and the company was upbeat about the outlook for 2023.
In its Q1 update Persimmon said that it expects to deliver volume growth of 4-7% this year, while maintaining its margins. The company was generally optimistic about supply and demand dynamics in the market, though many investors will be eager to hear if this remains the case three months on.
Looking further ahead, bosses appear confident that the outlook will improve, stating in their Q1 update that “the UK housing market remains supportive and the longer-term fundamentals are strong. Demand for new build homes continues to outstrip supply and mortgage availability remains positive”. At the same time, they acknowledge the near-term challenges, identifying consumer confidence and interest rates as key concerns.
With demand for UK homes continuing to exceed supply, there is potential for Persimmon’s half-year numbers to show growth, even as the wider UK economy struggles. If the company can back up a decent six-month performance with positive guidance when it issues its trading update at 7am on Thursday 7 July, investor confidence could begin to rebuild.