The Government’s plans to deliver 1.5m homes, combined with cheaper mortgage rates and more optimistic economic data, ought to be the best of news for housebuilders.
These businesses have been suffering from lower sales and low profit margins since the Liz Truss mini-Budget of 2022.
But the ‘get Britain building again’ policy should revamp their fortunes.
Other sources of cheer include the latest Office for National Statistics (ONS) numbers which show six consecutive months of rising property values.
There is also the prospect of deeper cuts to interest rates following this week’s fall in inflation to 1.7 per cent. As Russ Mould of broker AJ Bell puts it, ‘the stars are finally aligning for the housebuilding sector’.
Building back: If you are thinking of investing in housebuilder shares, be ready for a gamble and prepare to be patient
However, if you are thinking of investing in housebuilder shares, be ready for a gamble and prepare to be patient. This will be a long-term bet on the enduring British love affair with home ownership.
The Government’s chances of re-election in 2029 depend on enabling more younger people to realise the dream of a home of their own. To meet this goal, it seems likely that ministers will strive to overcome opposition to development – and this assumption has set shares soaring.
Persimmon’s price has moved more than 60 per cent higher to 1659.5p over the past year and Taylor Wimpey has jumped by 52 per cent to 163p. Over the same period, Barratt is up by 21 per cent to 488p. This £7.2bn FTSE 100 group is the industry number one, thanks to its takeover in August of Redrow.
But housebuilders seem to doubt government rhetoric, which is scarcely encouraging. On Monday Sir Keir Starmer made big pledges on the scrapping of bureaucracy which indicates a wide-ranging planning shake-up, with the reintroduction of local housing targets and development on scrappy pieces of the green belt land that have been dubbed ‘grey-belt’.
Yet on Tuesday Bellway, Britain’s fifth largest housebuilder, accused ministers of ‘talking down’ the property market and thus curbing customers’ enthusiasm.
Oliver Creasey, property analyst at wealth manager Quilter Cheviot says: ‘Housebuilders may have the land and the cash required to put up homes, but they also need a motivated clientele.’
Bellway cited talk of tax increases in Chancellor Rachel Reeves’s first Budget which may not be accompanied by incentives. It seems near certain that the stamp duty perks will end next April.
This means that the starting rate for this tax will return from £250,000 to £125,000.
The starting rate for first-time buyers will reduce from £450,000 to £300,000.
Overhaul: Deputy Prime Minister Angela Rayner
There is also unlikely to be a replacement for Help to Buy. This controversial scheme did aid thousands who could not rely on a Bank of Mum and Dad subsidy. But as Creasey points out, Help to Buy was also a boon for housebuilder bosses and shareholders.
Possible tax hikes are not the only obstacles facing the sector. Other challenges include the shortage of skilled construction workers and poorly-staffed planning departments.
The fall-out from the Grenfell tower fire in 2017 is another factor. In wake of the report into the tragedy, Deputy Prime Minister Angela Rayner seems set to give housebuilders a deadline of 18 months to fix deficient cladding on blocks. Companies have set aside cash for such expenditure, but acceleration will be expensive, as there are too few specialist fire engineers.
In August, Bellway was poised to buy Crest Nicholson for £720m. But the get-together was abandoned, apparently over the size of Crest’s remediation bill. Crest is also dealing with defects in some of its older sites.
There is more. Vistry, the number two in the housebuilder league, ought to be able to make the most of a push for affordable housing which is its specialist area. But this FTSE 100 business could be distracted by a cost estimate blunder at its southern division which sent its previously top-performing shares into a downward spiral. The price is down by 29 per cent this month.
The Competition and Markets Authority (CMA) is also investigating evidence of price-fixing among the eight largest companies. But despite these factors, investors remain upbeat, although their optimism is tempered by caution.
Alan Dobbie, manager of the Rathbone Income Fund, which holds Persimmon and Taylor Wimpey, says: ‘Changing the planning system will be neither quick nor easy. Nimbyist objections will remain and Starmer may find that upsetting small but vocal pockets of the electorate is less appealing in reality than in the abstract.’
The Aurora Investment Trust owns Bellway and Barratt. Gary Channon, the trust’s manager, is also sanguine about the outlook but not overconfident. He warns: ‘We don’t think [the Government] will be able to get near their 1.5m new homes target within their five-year parliamentary term.’
Against this background, if you already hold housebuilder shares, it seems worth sitting tight. Analysts have set an average target price of 581p for Barratt Redrow, with one analyst forecasting a leap to 760p.
Analysts have cut their target price for Vistry shares. JP Morgan’s target was 1550p. It is now 970p, against the current 968.5p. Crest Nicholson stands at 185.7p, but the average analysts’ target price is 227p.
If you are looking to add to your portfolio, Bellway is rated as a ‘buy’ by analysts.
The shares have risen by 53 per cent over the past year to 3222p, but Jefferies think that further gains could be possible, setting a price target of 3646p.
Jefferies’ other top picks include Persimmon. The broker has set a target price of 1969p for these shares.
Like other analysts, this broker also likes Taylor Wimpey, setting a target of 191p, against the current 162.95p.
Taking a stake in any of these companies is a bet on UK plc. But it is also a waiting game. Barratt is establishing a partnership with Homes England and Lloyds to build ‘garden villages’ and develop on brownfield land.
But Anthony Codling, analyst at RBC, does not expect people to be moving into these homes ‘until 2028-29 at the earliest’.
The Government will be hoping that other housebuilder projects produce somewhat earlier results.
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