Persimmon and Barratt shares squeezed by rising house prices

With building costs continuing to soar, key players in the UK house building industry like Taylor Wimpey, Persimmon and Barratt Developments have seen their share prices slashed, but sales are still fairly robust. 

House prices in the UK may have risen for the sixth consecutive month, but input costs and inflation are hampering construction activity and the house building industry is showing some signs of creaking, which could impact key players like Barratt Developments [BDEV.L],Persimmon [PSN.L] and Taylor Wimpey [TW.L].

Major construction projects costing £100m or more were down 31% in the three months to the end of May compared with the same period in 2021, according to data from Glenigan published at the end of June. Projects valued at less than £100m were up 9%, however.

Overall, the value of work started each month between March and May averaged £6.5bn, down 5% from the previous three-month period and down 22% from March to May 2021.

The industry has suffered from delays and long planning approval wait times, as well as being squeezed by supply chain challenges and labour and material shortages. But there’s hope of a rebound.

“While project-start levels continue to remain depressed, a strengthening pipeline of planned activity will no doubt provide a much-needed shot in the arm for the sector over the next six months and into 2023,” Glenigan senior economist Rhys Gadsby told Architects’ Journal.

Barratt’s order book is strong despite missed targets

The Barratt Developments share price stumbled last week on 14 July after the firm reported that it had missed its fiscal 2022 completion target. The stock fell to 445.5p, just above its 52-week low of 441.7p set the week prior, although it has since recovered to 481.9p. It’s down 33.7% since the start of the year as of 19 July.

Barratt completed 17,908 homes, up from 17,243 in 2021, but below the 18,000–18,250 it had forecast back in February.

CEO David Thomas said in a statement: “While there are clearly macroeconomic uncertainties ahead, the housing market remains robust, our forward order book is strong.”

Persimmon could be a buying opportunity

Labour and materials costs were to blame for Persimmon reporting a 10% drop in the number of homes it built in the first half of the year. It completed 6,652 homes in the six months to the end of June, down from 7,406 in H1 2021. It expects to have completed between 14,500 and 15,000 homes by the end of December, compared with 14,551 last year.

“We anticipate, however, profit at the half year to be modestly above our expectations reflecting strong demand and positive pricing conditions. Our forward sales position is robust,” commented CEO, Dean Finch, ahead of earnings on 17 August.

The Persimmon share price fell in reaction to the news on 7 July and has continued to trend lower in the days since, setting a 52-week low of 1,717.5p on 15 July. The stock has fallen 29.4% since the start of the year as of 19 July to close at 1,811.5p.

“Recent market concerns around higher input costs, buyer affordability and cladding mean valuations for the entire sector have come under fire. That could offer an attractive entry point for Persimmon, which currently trades below the ten-year average valuation,” noted Hargreaves Lansdown equity analyst Laura Hoy.

Taylor Wimpey expects minimal growth in 2022

Taylor Wimpey hasn’t issued an update on completions in the first six months of 2022, but it completed 14,087 builds in 2021, up 47% from 9,609 in 2020. Back in March, it said it expects to “deliver low single digit” growth in 2022 “assuming the market remains broadly stable”.

The Taylor Wimpey share price is down 28.9% year-to-date to 120.65p. It recorded a 52-week low of 110.3p on 11 July.

Liberum analyst Charlie Campbell has predicted “resilient” and “robust” trading for house builders, even if sales do slow as a result of a material shortage. “We are convinced that macroeconomic challenges will not end but only slow the housing cycle,” Campbell wrote in a note seen by Proactive Investors.

The broker recommends buying a number of the housebuilding stocks, including Taylor Wimpey, Barratt and Persimmon.