Persimmon [PSN] shares have fallen more than 35% this year amid investor fears that rising interest rates could trigger a slowdown in the UK property market.
The FTSE 100-listed housebuilder is not alone in seeing its share price tumble this year. Shares in the company’s peers have also suffered hefty year-to-date declines, with Barratt Developments [BDEV] down 36.2% and Taylor Wimpey [TW] down 30.6%. Berkeley Group [BKG] has fared slightly better, its stock down 16.7%. However, all four are underperforming the FTSE 100, which is down only 0.3% over the same period.
Having opened at 1,860p on Monday morning, the Persimmon share price is still roughly 8% above the 52-week low of 1,717.50 that it hit during intraday trading on 15 July. If the company’s half-year results, due out on Wednesday, fail to allay investors’ concerns, there is a chance that we may see the shares slip back in the direction of last month’s low.
Investors wary as interest rates rise
To combat soaring inflation, the Bank of England has raised interest rates six times since December. The latest increase – early August’s bumper half-point hike – lifted the base rate to 1.75%. Since higher rates mean bigger mortgage repayments, would-be home buyers may choose to postpone their move. There are signs that this drop in demand is already filtering down into falling prices.
The UK property market may have reached a turning point. Although annual house price growth in the UK still sits above 10%, the average price of a British house dropped 0.1% between June and July – the first monthly decline in a year. Early signs of a slowdown, alongside fears of a recession, have left some investors jittery.
Half-year profit set to beat expectations, despite lower revenue
Despite the share price’s travails, the business itself remains robust. According to Persimmon’s half-year trading update, issued last month ahead of the official half-year results on 17 August, total revenue in the first half fell to £1.69bn, down from £1.84bn a year earlier, partly due to fewer completions. The company completed 6,652 properties in the first half of the year, down from 7,406 in the first six months of 2021.
However, there were areas of growth. Forward sales increased to £1.87bn in the first half, up from £1.82bn a year ago, and the group’s average selling price grew 4% year-on-year to £245,600.
That said, the company warned that the rising cost of materials, labour and energy were driving up build costs. So far, these increased costs have been passed on to buyers, but this could be tough to maintain if average house prices fall.
Despite these challenges, the trading update indicated that half-year profits are expected to be “modestly above” expectations.
Although negative sentiment appears to be weighing on the company’s share price at the moment, bosses remain optimistic that the current headwinds are temporary. The recent statement highlighted the solid fundamentals of the UK housing market, where population growth and a shortage of housing stock fuel demand and push up prices.
With “the longer-term fundamentals of the housing market remaining strong, we are confident that…the group is well positioned for the future,” the company said in last month’s half-year update.
Overall, analysts hold a positive outlook on Persimmon stock. Out of 18 analysts polled for the Financial Times, six rated the shares a ‘buy’, seven believed they would ‘outperform’, four considered them a ‘hold’, while only one said they would ‘underperform’. Out of 14 analysts offering 12-month price targets, the median was 2,564.50p, representing a 38.85% increase on the 12 August closing price of 1,847p.
Although rising interest rates may dent homebuyers’ confidence in the near term, UK property prices have weathered recent crises of economic confidence in the form of Brexit and Covid, with average selling prices continuing to go up and up. This speaks to the robustness of the UK housing market, where demand from domestic and overseas buyers continues to outstrip supply. There may be bumps in the road, but Persimmon’s half-year results – due to be released at 7am on Wednesday 17 August – are likely to emphasise the long view.
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