Housebuilding stocks recover as industry reaches ‘rock bottom’
The UK’s biggest housebuilder kept to the well-rehearsed tone of gloom which has loomed over the sector in recent months, when it became the latest to pull back on spending amid the market uncertainty caused by the Iran war.
FTSE 100 firm Barratt Redrow said its financial targets hold firm, but warned that the blockage to the Strait of Hormuz could cause building costs to soar next year, with mortgage rates also expected to continue spiralling.
Property experts say the Iran war has dampened demand in the already-fragile housing market, and mortgage lenders have pulled deals off the market at pace.
“The ongoing conflict in the Middle East is contributing to increased economic uncertainty, including the potential for a more prolonged higher interest rate environment and renewed cost pressures,” Barratt Redrow said.
The housebuilder said it will take an “even more selective” approach to land buying, slashing the upper limit of its projected spend on new plots by 11 per cent to £800m.
Earlier this month, FTSE 100 rival Berkeley said it will halt land buying entirely – to insulate itself from an “unprecedented increase in cost and regulation” – prompting its share price to sink by 17 per cent.
Housebuilding stocks take surprise jump
Shares in FTSE 250 housebuilder Vistry stuttered in recent weeks following the sudden departure of chief executive and City favourite Greg Fitzgerald, who was replaced this week by surprise internal pick Adam Daniels.
Vistry’s shares price, which has halved so far this year, fell 22 per cent after Fitzgerald quit and dropped a further four per cent when Daniels was announced as his successor.
But rather than continue their recent decline, housebuilding shares made a surprise jump on Wednesday after Barratt Redrow’s latest inflation warning.
The FTSE 100 firm jumped as much as 2.4 per cent and Vistry climbed by 2.5 per cent, while Berkeley, Bellway and Persimmon each rose by more than one per cent on the market open.
With each of these housebuilders down more than 15 per cent in the year so far, some analysts believe this shock jump is a sign that these stocks have reached their floor.
Lale Akoner, a global market analyst at eToro, told Morning Wire: “Recent share price jumps in housebuilders likely reflect investors viewing the sector as having reached a valuation floor after a prolonged downturn.
“Barratt Redrow’s update still highlights fragile demand, with rising mortgage rates, living costs, and a softening jobs market weighing on activity.”
While housebuilders’ outlook is far from rosy, these firms may have run out of room to fall any further, Akoner said.
“Overall, investors appear to be pricing in stabilisation rather than a strong rebound in housing demand.”
‘I can’t see we’ve hit rock bottom’
Richard Hunter, head of markets at Interactive Investor, told Morning Wire Wednesday’s share price jump reflects that the UK’s leading housebuilders are “very well run companies [with] strong balance sheets”.
Despite Barratt Redrow’s land buying cut-back, the firm has stood by its house completion and profit targets, and even upgraded its end of year net cash forecast by 30 per cent, to a £650m upper limit.
Given the exposure of these firms to fluctuating demand and supply chain inflation, they are wise to hold onto cash and opt for “selective” approaches to expansion, Hunter said.
“[But] those are just the levers within their control. If you look at the macro environment, it’s very difficult to see that a rerating of the sector could come along any time soon.
“I certainly can’t see that we’ve necessarily hit a bottom today, with the backdrop remaining so uncertain,” he said.