Shares of FTSE 350 house builders have started the year on a slump. Crest Nicholson (CRST) for instance, has seen its year to date (YTD) share price drop 27.70%, while rival Persimmon (PSN) saw its share price plunge 23.39%.
The stocks may fall further. Some analysts are predicting a slowdown in the housing industry in the coming months. Their predictions are backed by reports from Zoopla which last month showed property values going up by just 0.9% in the past three months – the slowest growth since August 2020.
But is this the only woe for the UK listed homebuilding sector?
Crest Nicholson (CRST) chart
Coughing up for cladding
According to reports, the government intends to scrap its plan to ask housebuilders to contribute towards a £4bn cladding remediation fund, but that still won’t stop the current cladding improvement bills from ramping up.
House builder Crest Nicholson said this week that it will suffer another hit of around £80-£120m in extra cladding bills as it has committed to further fire safety works on tall buildings. The bill for its cladding fixes has already come to a whopping £47.8m so far.
The pledge comes as Crest, along with other builders like Persimmon, commits to the UK government’s new Building Safety Pledge which involves developers improving the safety of cladding on buildings between 36 feet and 59 feet high.
Rival Persimmon has set aside £75m for the scheme, while Vistry Group (VTY) has also accounted for it. “Vistry has taken provisions of some £25m and is preparing for a further £30m to £50m,” says AJ Bell investment director Russ Mould
“The biggest issue for housebuilders, the one that just keeps nibbling away at investor confidence is that of cladding remediation. It may be that agreement has been struck with the government which won’t require housebuilders stumping up for a £4bn fund just yet but the costs of making good medium rise buildings constructed over the last thirty years will be substantial and whilst there are still surprises to be had markets aren’t able to fully price this in,” says Danni Hewson AJ Bell financial analyst.
Rising costs
Rising costs, both for the consumer and for the homebuilding trade are likely to be a thorn in the side of the sector too. For developers the bill for materials and the cost of labour are set to rise even further.
Consumers, meanwhile, will suffer from an increase in energy costs, taxes, and food bills leaving very little disposable income to save for deposits for new build homes. “A squeeze on household finances from rising living costs will at some point start to take its toll on demand, as would further increases in interest rates that make mortgages less affordable.
“January’s Office for National Statistics figures showed property costs an average of 9.1 times earnings – up from 7.9 a year earlier. That’s not a sustainable increase, and once property prices either stabilise or drop off, it’ll start to weigh on margins for housebuilders,” points out Matt Britzman, equity analyst at Hargreaves Lansdown.
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Rising interest rates are likely to have a negative impact too. “Shares in housebuilders have had a torrid start to the year despite house prices which continue to soar to record highs. Investors are understandably nervous of what rising rates might do to mortgage approval numbers and affordability at a time when would be house buyers are also having to deal with a cost-of-living crisis which shows no signs of abating,” Hewson adds.
Not all doom and gloom
The UK’s listed home builders have several challenges facing them now and in the future, including cladding bills, the cost-of-living squeeze on consumers as well as the rising cost of materials and skilled labour.
But for now, home builders are seeing a marked improvement in their results and are still taking advantage of the boom in the market. “We’ve seen housebuilders come out with some stellar 2021 performance figures over the last month or so. With interest rates relatively low, mortgages readily available and a lack of supply in the UK market, it’s been a recipe for booming profits,” Britzman says.
What’s more, many are still pushing ahead with plans to expand their offering and have cash reserves to fund these ambitions. “The likes of Taylor Wimpey and Persimmon still expect margins to remain stable or increase throughout 2022, despite rising costs.
“Plus, the exceptional year means these groups are sitting on nice chunks of cash to help weather any storms that may come their way, and they’ve been able to invest in bringing new land onto their books which is key for delivering more homes,” Britzman adds.
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