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UK housebuilders under pressure

The UK housebuilding sector faces several challenges, all of which have weighed on its performance, but valuations still remain interesting.

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.
Housebuilding
Source: Bloomberg

This year has been a tough one for UK housebuilder shares. Of the eight main listed home building firms, all are in negative territory, excluding dividends, with losses ranging from 10% to 25%.

Falling property prices have darkened the outlook for the sector, suggesting a downturn in earnings for the big firms. Year-on-year (YoY) growth has slowed to its lowest level since 2013, as the chart below shows:

A weaker pound continues to make life difficult for the sector too; data from engineering firm Aecom suggests that prices rose 4.9% in the year from the second quarter (Q2) 2017 to Q2 2018, continuing a steady rise over the past decade that has intensified since the beginning of 2016.

This is all in contrast to 2017, when the sector outperformed the broader market, lifted by solid demand and the absence of Brexit-related negativity. Now, margins are under pressure, and the clock is ticking on a Brexit deal, with no real progress yet made.

A long-term problem has also appeared. Help to Buy, which was introduced to support demand, will now end. It had been scheduled to end in 2023, but the Treasury extended it for two more years. Housebuilders now know that the government safety net that aided performance in the post-crisis years will be removed in due course, and they must become more selective about where they build homes.

Valuations in the sector remain relatively low, with forward earnings multiples averaging 7.89 for the major firms, while dividend yields remain healthy and are well covered. The problem is that after years of easy money, interest rates are on the rise, albeit slowly, while the outlook for the UK economy remains clouded by Brexit.

Share prices in the sector lack a positive catalyst, and the low valuations on offer merely underscore the difficulty facing the major names. Until Brexit is resolved, it is likely that investors will remain cautious about the housebuilders, even with the solid dividends on offer.

Brexit

Find out what Brexit could mean for the markets and how a hard or a soft exit from the EU could affect traders.

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