We all know how badly UK housebuilders have fared since the Brexit referendum. The question now is whether investor fears are well-founded, or whether we’re seeing an emotional over-reaction. Or both.
Fears of a slowdown have been voiced by Barratt Developments (LSE: BDEV). In its 23 July update ahead of full-year results (due on 7 September), chief executive David Thomas said it was too early to determine the effects of leaving the EU. But the firm later told Reuters that it might slow down its pace of building due to greater post-vote uncertainty, and that it will review its policy towards the acquisition of new building land.
The referendum fallout, which hit banks pretty hard too, is also likely to lead to more uncertainty around mortgage approvals, though it’s too early to know what effect that will have on house prices. But with prices still rising ahead of inflation and wages, would a cooling off really be such a tragedy?
Share price slump
A month on from the fateful day, the share price falls themselves don’t make for happy reading, with Barrett shares falling 28% to 413p. Peer Taylor Wimpey (LSE: TW) lost 23% to 147p, while Persimmon (LSE: PSN) is down 24% to 1,598p.
One upside is that should house prices slow or fall, it would provide new opportunities for topping up these companies’ land banks. Barratt told us that in the year just ended it has “secured excellent development opportunities that meet or exceed our minimum hurdle rates of 20% gross margin and 25% site ROCE,” with over 24,000 new plots added to its portfolio.
In its most recent update in April, with first-half results to come on 1 August, Taylor Wimpey said its strategic land pipeline consisted of around 105,000 potential plots at the end of March after it continued to snap up land at similarly attractive profit margins to 2015. With an order book of 8,811 homes at the time, that’s enough to keep it going for a good few years.
Ahead of interim results (due 23 August), Persimmon said it had acquired 7,100 new plots in H1 while selling 7,238 new homes. It’s been replenishing its land fast, and the total of 54,300 plots owned at the end of December 2015 is in no danger of running short. So it seems the potential benefit of more cheap land is one none of these three needs and is perhaps not that much of a bonus after all.
Sunshine ahead
On the brighter side, we’re still facing a big shortage of affordable homes, and interest rates are going to stay low for longer now with mortgage rates remaining more affordable than they’ve been for years. The government’s Help to Buy programme has been extended to 2021, and its Starter Homes scheme still aims to provide 200,000 homes for first time buyers by 2020.
Turning to share price valuations, we’re looking at a P/E multiple for Barratt Developments of only around eight based on full-year expectations and 2017 forecasts, with dividend yields of better than 7% pencilled-in. Taylor Wimpey shares are on a multiple of just under nine, though potential dividend yields approaching 9% in 2017 are higher. Persimmon shares are approximately nine times forecast earnings, with dividend yields at 7%.
My verdict? We may well see some changes to land acquisition and house price uncertainty ahead. But the share price falls have been overdone in the grip of irrational fear. These three look like great long-term bargains to me.
