London: House prices are falling, mortgage lending is stagnant and the economy is in recession for the second time in three years - yet housebuilders are reporting record increases in profits and their share prices are up 50 per cent in the year to date.
Crest Nicholson, which suffered badly during the global financial crisis, is poised to relist on the stock market; while Redrow, another of the worst hit, could be taken private by its founder Steve Morgan.
Why the sudden upsurge in activity, given that housebuilders themselves remain consistently bearish about a speedy recovery in the housing market? Charlie Campbell, analyst at Liberum Capital, says housebuilders do not need an improvement in the housing market to deliver an increase in profits.
“You can be bullish on the sector without being bullish on house prices,” he says. “All housebuilders need is a stable housing market and for new housing to outperform existing and those are exactly the conditions we have now.”
Housebuilders were savaged during the financial crisis as house sales halved and land values plummeted. Smaller construction companies went bust while the listed companies were forced to downsize, tap shareholders for cash and write down land bought at the height of the housing boom in 2007. According to Knight Frank, land prices had fallen by up to 60 per cent at the end of 2009 from their peak two years earlier.
But housebuilders also exploited falling prices to buy land cheaply. Some even gambled on the property market by raising almost £120 million to buy land at distressed prices.
Now the bets have paid off. Chastened by the recession, housebuilders are focusing on profitability rather than sales. They have built more lucrative family homes rather than apartments, targeted London and the south-east, and gained from government schemes such as NewBuy- which allows those struggling to get on the housing ladder to buy a new home with a deposit of just 5 per cent.
About 20 per cent of sales have been through shared equity schemes including the extended First Buy scheme.
But the biggest savings have been on land. Housebuilders are progressively getting rid of land that was acquired expensively in the boom years of 2006 and 2007. More than half of Barratt’s homes to be sold this year are built on land bought since 2008.
Varde, the distressed debt fund that owns most of Crest Nicholson, is keen to capitalise on the change in the sector’s valuation by seeking a stock market listing estimated at £500 million.
Rachel Wareing, an analyst at Panmure, says sector valuations are their most positive in years. “For someone like Crest who has sat the downturn out, they now have the opportunity to get much better value than they would have a year ago.”
Campbell, at Liberum, believes the fundamental drivers behind the sector remain positive. “We are still not building enough homes to meet the needs of the country,” he says.
“This should mean that demand for new homes continues to hold up well, so long as mortgage supply doesn’t deteriorate further.”
— Financial Times
