Like many housebuilding stocks, the Redrow (LSE:RDW) share price is on the rise. Over the last 12 months, it’s achieved a market-beating return of more than 65%. By comparison, the FTSE 100 has only increased by 25%.
But can it maintain this level of growth? And should I be adding this business to my portfolio?
The rising Redrow share price
2020 created a challenging operating environment for homebuilders, and Redrow was no exception. With national lockdowns slowing the construction process and house viewings delayed for safety reasons, the company saw a considerable drawback in both revenue and profits.
However, as the business adapted to the new operating environment and lockdown restrictions began easing, its performance has been quite impressive. At least, I think so. Thanks in part to the temporary suspension of stamp study and government support schemes, Redrow’s total sales over the last six months have increased to £1.04bn. That’s about 7% higher than pre-pandemic levels. What’s more, total half-year home completions are back on the rise, with 3,065 houses finished compared to 2,554 in 2020.
Needless to say, these results are fantastic news. With £1.3bn in the order book, I believe that the impact of Covid-19 has finally worn off. And the management team appears to agree, given that it recently reinstated shareholder dividends. So, seeing the Redrow share price climbing these past few months is quite understandable.
Risks to consider
For the moment, house prices are rising thanks to increased demand, especially for properties that have a garden or large open outdoor areas. However, a lot of this growth stems from the favourable buying environment created by those government support programmes that are slowly being removed.
The suspension of stamp duty has already been lifted, while new restrictions were added to the Help-to-Buy scheme that’s scheduled to end in March 2023. The latter is of particular importance as it has substantially improved the affordability of properties. Once this scheme ends, the benefits end with it, and house prices may subsequently fall.
Another risk factor is interest rates. At the moment, they’re at record low levels of 0.1%. This has made mortgage loans far more accessible to low-income consumers. But I think it’s highly likely that rates will once again increase as the economy recovers from the pandemic. Consequently, interest payments on variable-rate mortgages will rise and could lead to a substantial slowdown in house sales as well as values.
The bottom line
Despite Redrow showing some impressive performance, the share price is still trading below its pre-pandemic levels. I believe it’s capable of recovering in 2021, assuming it can maintain its current growth.
However, like other homebuilders, the company appears to be heavily dependent on government support schemes to drive sales. Given that these are ending in the near future, I’d rather wait and see how the firm performs without this assistance. Therefore I won’t be adding any shares to my portfolio today.
Zaven Boyrazian does not own shares in Redrow. The Motley Fool UK has recommended Redrow. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.