Beware the housebuilder optimism
House prices increased in May, according to the latest figures, but be wary of sector optimism as further deterioration is set to come
Though those looking to call a bottom to the housebuilding sector will see today’s figures as encouraging, particularly following recent company trading statements detailing better sales volumes, analysts at KBC Peel Hunt and Panmure Gordon believe further sector deterioration is on the cards.
KBC Peel Hunt analyst Robin Hardy described the rise in the Nationwide House Price Index, which was the second monthly rise so far this year after March marked the first increase since October 2007, as “just statistical noise or volatility due to a thin market.”
“The market is still weak and is woefully short of the levels of mortgage finance needed to restore balance or a positive environment, Hardy added.
Panmure Gordon analysts Mark Hughes and Rachael Waring appeared to be in agreement, writing in a note to investors this morning that in the face of little positive economic data, prices are likely to return to a downward trend over the coming months. “We therefore maintain our belief that conditions will deteriorate over the summer months for all UK housebuilders,” the analysts said.
Summer is a traditionally quiet time for house building, and if volume growth deteriorates, pricing falls once again and company profit margins (or lack of profit margins) continue to decline, Panmure Gordon expects market conditions to continue to suffer during this period. “This is likely to be followed by further land write-downs across the sector,” Hughes and Waring wrote.
In addition, several sector players still need to shore up their balance sheets. Reeling off the names of those in need of extra funds, KBC Peel Hunt’s Hardy said Barratt Developments needs new equity to stave off a covenant breach, Redrow needs a cash call to expedite change and Persimmon may need new funds to provide adequate funding for an ultimate rebuild.
Hardy noted that Taylor Wimpey made a timely call feeding into the beta rally and the improved appetite for risk and cyclicals. However, “the shares have collapsed to almost the issue price, potentially damaging the chances for the rest, especially now that money is more scarce,” said.
KBC Peel Hunt said it is concerned that those that need the money more than want it may find equity funding more difficult: “As we have stressed before, Barratt should have raised money in February and may have missed the boat.” Hardy recommended investors continue to take profits across the board.
Panmure Gordon’s sector stance also remains Negative. The stockbroker has Sell recommendations on Barratt, Bellway and Redrow, and Hold ratings on Bovis Homes, Persimmon and Taylor Wimpey. The broker believes individual share prices should ultimately sit at trough net asset values—after all write-downs have occurred and after the impact of needed fundraisings has been absorbed.
