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Housebuilders’ share price rebound set to continue

Housebuilders’ share price rebound set to continue

The UK housebuilding sector started off 2020 on a positive note, thanks to the boost it received from UK general election outcome in December 2019, where the pro-business Conservative party won a big majority.

In late January the UK left the EU, immediately entering into a transition period. With the date well sign-posted, there was little volatility, and besides, negotiations were due to get underway to hammer out a trade deal for when the UK would exit the transition period at the end of 2020.

Pandemic blows hole in housebuilders’ lofty share prices

Brexit was tipped to be the big event of the year, but that was to take a back seat to the coronavirus pandemic. The health emergency clobbered global stock markets, and UK housebuilders were no exception. Some people were concerned that British homebuilders had lofty valuations going into the crisis – many had recently hit record-high share prices, while others had set multi-year highs. The prospect of economies being locked down and the expectation that there would be a severe global recession, prompted a huge wave of selling. Traders took the view that the jobless rate would surge and that demand for houses would fall off of a cliff.

Rate cuts bolster housebuilders

The UK government reacted by announcing a furlough scheme as a way of preventing the unemployment rate from surging. The programme was meant to end in late October, but was extended first to March and then April 2021. The Bank of England supported the economy with two interest rates cuts in March, from 0.75% to a new record low of 0.1%. The Bank’s asset purchase scheme stood at £435bn before the health crisis, and after three rounds of increasing the programme, it now stands at £895bn. The Bank has even mentioned the possibility of introducing negative rates as way of supporting the country. All of this bodes well for the British housing market, as rock bottom interest rates equate to cheap mortgage rates. Moreover, it’s highly likely that rates will remain cheap for many years to come, and that should help demand for houses for the foreseeable future.

When the country was locked down as a result of the pandemic, construction activity ground to a halt and the property market was closed. In light of the dire economic situation, there were concerns property prices would suffer into 2021. Economists were forecasting a downturn despite the Bank’s policy, the furlough scheme and the generous cuts to stamp duty. To keep assist the housing market, the government lifted the stamp duty exemption level to £500,000 in England and Northern Ireland until the end of March 2021. 

UK housing market’s mini boom

In July, the Centre for Economic and Business Research predicted that UK house prices would fall by 5% in 2020, and by a further 10.6% in 2021. However, once some normality returned to the housing market and the economy during the summer, there was a mini surge in demand for properties, as pent-up demand from the lockdown was released. In August, Rightmove announced its highest level of sales in one month for over 10 years. Different surveys obviously produce different readings with respect to average house prices, but the common theme has been that prices are on the rise too. Nationwide’s survey showed that prices rose by 6.5% on an annual basis in November – its largest gain in five years.

In light of the uncertainty surrounding the UK leaving the EU, certain quarters of the building industry were preoccupied about future demand. February’s construction purchasing managers’ index (PMI) reading was 52.6 – the first positive reading (over 50) in nine months. In April, the metric plunged to just 8.2, the lowest reading on record. By comparison, in the depths of the credit crisis the lowest reading was 27.8. Construction activity rebounded once the lockdown was lifted, and July's PMI reading of 58.1 evidenced the fastest rate of expansion in five years. Since then, the rate of growth has cooled, but it remains in expansion territory.

Housebuilders restart dividend payouts

When the pandemic set in, construction activity was abruptly halted and all the firms, with the exception of Berkeley Group, declared that their dividend would be postponed or cancelled. Slowly but surely, construction work recommenced in late spring and early summer. In light of the huge disruption caused to the sector, profits slumped as house completions tumbled. Traders were not too upset by the revelations because broadly speaking, demand was high and order books surged. Essentially, housebuilding activity was pushed into 2021.

All the firms that suspended payouts have either resumed paying dividends, or announced their intention to recommence paying them. This makes housebuilding stocks more attractive to income-seeking investors. The operational performance of these companies in 2020 was poor to say the least, but the outlook for next year is upbeat.

Economic uncertainties clearly exist because the health crisis is still very much with us, even though vaccines have recently been rolled out, albeit on a small scale. And there are several policies in place to help combat dire situation. First-time buyers can benefit from 5% deposits, there’s the waiving of stamp duty on properties worth up to £500,000 and reductions beyond that mark, while the Help-to-Buy scheme will last until 2023.

In terms of average selling prices, Vistry Group has the lowest at £222,000. Persimmon, Taylor Wimpey and Barratt Developments have average selling prices of between £246,000 and £280,000. Redrow’s prices are in the region of £387,000, a sizeable jump compared with most of its rivals, but still comfortably inside the £500,000 stamp duty cut-off mark. Berkeley is the outlier, as its average prices are just off £800,000, but the group has always focused on high-end properties, mostly in London and the south-east.

Persimmon share price outperforms rivals

The Persimmon share price is the outperformer of the bunch, only subsiding by 5% over the last year. By contrast, the FTSE 100 and FTSE 250 have fallen by 14% and 11.2%, respectively. Persimmon posted its first-half numbers in mid-August, as profit-before-tax slumped by 42% to £292m. Three months later the group revealed its third-quarter update, revealing forward sales had surged by 43% to £1.36bn. Its liquidity position is strong, standing at £960m – so it’s clearly well-financed to carry out the work in its pipeline.

Vistry share price lags behind

Vistry’s share price was the worst performer, lagging greatly behind its peers with respect to its dividend. It was in early December when the group announced it would consider reinstating the dividend. By contrast, Persimmon announced plans to resume dividend payments in August. In November, Vistry confirmed forward sales of £1.5bn, with £770m in liquidity. 

Source: CMC Markets

Lately, demand for housing has been healthy and there has been little evidence of things cooling down. When the furlough scheme finishes at the end of April we'll get a clearer picture of the true state of the UK labour market, which could impact sentiment. However, economic sentient should tick up now that Covid-19 vaccines are being rolled out, so things are still moving in the right direction, while the UK’s central bank is likely to keep monetary policy very loose due to the political and health situations.

The UK’s housebuilders had a dreadful 2020, but as we head towards 2021, there appear to be some solid foundations, with demand high, order books healthy and liquidity positions robust. 

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