Trade remains robust despite forecasts of slowdown

UK homebuilders made good profits in 2022, but will that change? Photo: Shutterstock

The homebuilding sector continues to shine despite all the gloom from cost of living pressures and rising interest rates, as recent trading updates from Bellway (BWY) and Crest Nicholson ( CRST).

There have been signs in recent Purchasing Managers’ Index (PMI) surveys that the market is beginning to calm down: the most recent UK construction PMI data for May signals the weakest increase in residential work for two years, are not favorable.

And little is said now of the 300,000 new homes each year by the mid-2020s that the government pledged to build in its pre-election manifesto. Concerns have been raised that construction is close to a major downturn.

Homebuilders remain positive

But as Russ Mould, chief investment officer at AJ Bell, argues, recent updates from Bellway (BWY) and Crest Nicholson (CRST) suggest demand is still robust overall.

“Perhaps more impressively, pricing momentum continues to outpace rising costs and, as a result, margins are increasing. This suggests that both companies are doing a good job of providing the type of homes people are looking for. »

His view is echoed by Scott McKenzie, fund manager at Amati Global Investors, who says UK homebuilders have had a strong year 2021/22 overall, with rising house prices managing to cover comfortably the inflation of building material costs.

Need new homes

Mold also points out that a move towards hybrid working means those who can afford it are often looking for additional space to accommodate a home office. The supply of new homes remains a long-term problem in the UK, which is helping to support the market.

“Crest Nicholson may have been pushed into a first-half loss by the charge he took on dealing with fire safety issues on apartment buildings, but investors seem relieved that he’s tackling that issue head-on. , allowing him to move forward.

“After all, it’s worth fixing the roof while the sun is shining and before there’s a downpour in the form of falling property prices and falling demand.”

He adds that with high personnel and raw material costs, companies like Bellway and Crest Nicholson are exposed to the risks associated with a market downturn.

“All they can do is lay a solid foundation,” he says, “including buying land at low prices to improve the economics of future developments, so they can weather any storm.” to come and emerge safely from the other side. Notably, Crest Nicholson and Bellway operate with large cash reserves.

All eyes will be on other homebuilders due to report soon, including trading updates from Persimmon (PSN.L) and Barratt Developments (BDEV) next month and half-year results from Taylor Wimpey (TW .) Early August.

Homebuilders’ profits will slow

McKenzie doesn’t foresee a housing market crash — which he says would take a combination of interest rates north of 5% and a significant rise in the unemployment rate that he doesn’t expect. He believes, however, that homebuilder profits have peaked and will slow as we head into 2023.

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And even if the government’s pre-election promises to build 300,000 homes do not materialize, he stresses that there is still a great housing shortage and the need is not going away.

He is considering more partnership/social housing and build-to-let projects. On the back of that, he invested in stocks such as Vistry Group and Grainger.

Peel Hunt analyst Sam Cullen maintained his ‘buy’ recommendation for Bellway with a target price of £40.40 on the stock – currently the stock is around the £23.21 level. Cullen points to a strong forward order book and that the homebuilder had a “decent buffer, while its balance sheet remained in good shape.”

“With stocks trading at around 0.73x tangible net asset value, we believe the market continues to price in too much bad news,” he said.

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