With Brexit looming, the housing market slowing down and corporate excess generating negative headlines, life should be hard for listed housebuilders. But recent results from the biggest names show that firms have been remarkably effective at generating profits and payouts for shareholders - despite very modest rises in the number of houses sold and the prices realised for them.
Investors can usually shrug off adverse publicity over mammoth bonuses if share prices and dividends keep rising.
But what has spooked investors very recently has been the threat of Government intervention in the Help to Buy programme. State support for the housing market in the early years of the Conservative administration has been seen as a major driver of the profits enjoyed by housebuilders in recent years. Now the fear is that what the Government can give, it can also take away.
Persimmon’s (PSN) £1 billion annual profit for 2018 would ordinarily be cheered by shareholders. But the results were overshadowed by negative publicity over the housebuilder’s contract to provide Help to Buy homes. Reports over the weekend suggested that Communities Secretary James Brokenshire MP is considering excluding Persimmon from the Help to Buy scheme amid concerns over the build quality of its homes. Shares fell sharply on the day after.
Tom Brown, managing director of real estate at investment company Ingenious, said: “Persimmon’s 2018’s pre-tax profits were broadly in line with forecasts however recent sharp falls in its share price and those of other housebuilders in the UK betray a sector which has a lot to lose from a disorderly Brexit and an economic downturn.”
The sector’s share prices sold off sharply after the Brexit vote in 2016, made a very strong recovery until the summer of 2018, but fell back again in the last six months. Prices have rebounded in the year to date along with wider rises in world markets.
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Other analysts have pointed out that to exclude one firm from a scheme that has given the housing market a boost in the last six years – and enriched excecutives at these companies – would be unprecedented. Help to Buy has enabled many first-time buyers to enter the housing market with low deposits and via shared ownership. Nearly 200,000 people have benefited from the scheme since its launch in 2013 – the scheme was meant to end this year but was extended to 2023, with restrictions kick in from 2021.
Help to Buy has become a significant earner for Persimmon so Government intervention is a significant risk to rank alongside Brexit.
Persimmon has returned a significant amount of cash to shareholders since the financial crisis, and combined with the resilience of the housing market, its share price has soared. Its “capital return plan” runs until 2021 and it has returned over £2 billion to shareholders since 2012. Persimmon is currently yielding nearly 10% and that makes it the FTSE 100’s highest yielding share, according to Morningstar data.
Signs of a slowdown in the housing market’s growth was in evidence in the annual results: the volume of houses sold by rose by just 406 in a year to just over 16,449, with the average selling price 1% higher year on year.
Barratt Developments (BDEV) completed on just 298 more homes in the first-half of 2018 than it did in the first half of 2017. However, pre-tax profit rose 19% to £408 million.
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Taylor Wimpey (TW) profit also rose 19% on the year. It will raise the total amount of dividends paid from just under £500 million in 2018 to £600 million in 2019, which would mean that at current share prices, the company yields over 10%, leapfrogging Persimmon. Taylor Wimpey is less reliant on Help to Buy than Persimmon but prices of homes under the scheme are up over 5%, compared with negligible growth in non-Help to Buy homes.
Taylor Wimpey’s chief executive Peter Redfern told the BBC this morning that the price of new homes has been more resilient than the wider “secondary” market of non-new homes, which makes up the bulk of house price indices. But this week’s figures from the big names have shown a modest rise in prices achieved last year.
FTSE 250 firm Bovis (BVS) is smaller than its FTSE 100 rivals Persimmon, Taylor Wimpey, and Barratt, but the firm’s annual results conformed to the prevailing pattern of higher profits and higher payouts. It had been dogged by concerns over build quality, meaning that its shares have lagged the booming sector in recent years.
But pre-tax profit was up nearly 50% at £168 million, a new record, and the board recommended a 20% increase in the total payout for the year to 57p per share. The yield, at over 4%, is standard for the sector. Again, this cash generation is at odds with the increase in completion rates: the firm sold just 114 more homes in 2018 than it did in 2017, and the average selling price is just 0.3% higher year on year.
