UK housebuilders plagued by upheaval as Burnham hopes for homes

[LONDON] Andy Burnham is the latest UK leader to call for many more homes to be built – yet earnings from the biggest housebuilders contain few signs that the long-awaited construction boom is coming.

As recently as 2022, builder Persimmon enjoyed operating profits exceeding £1 billion (US$1.4 billion) and Taylor Wimpey wasn’t far behind. Now they are both around half of that. On Tuesday, Bellway warned its operating profit for this year would be at the bottom end of its guidance and called on the government to bring back financial support for buyers.

The issues plaguing these firms have built up over years, but made worse by recent geopolitical upheaval.

The inflation shock that followed Russia’s war in Ukraine jacked up the cost of building a house, while also straining the budgets of buyers via both consumer prices and rising interest rates on mortgages. The Iran war has triggered a fresh spike in inflation expectations. And planning rules, a frequent irritant, are changing again.

In an effort to preserve cash, Taylor Wimpey last month almost halved its dividend policy from 7.5 per cent to 4 per cent of net assets, as hopes of a housing market recovery evaporated with the prolonged conflict in the Middle East.

The move prompted an 8 per cent drop in the share price of the High Wycombe-headquartered firm, which is popular with retail investors for its track record of payouts.

“At this point we all agree that the housing market is in a prolonged downturn,” Taylor Wimpey CEO Jennie Daly told Bloomberg. Operations are “uniquely challenging”, and “there is a risk that the sector will contract and volumes will fall”, she added.

Slow build

Over the years, developers have responded to these pressures by building and then selling fewer homes: Persimmon completed on more than 15,000 properties in 2016, while last year’s total was nearly 12,000. Taylor Wimpey’s completions fell from 14,000 to just over 11,000 per year.

To be sure, there are some signs of increased activity in certain areas. Britain’s largest housebuilder Barratt Redrow last year completed on 17,667 homes, the upper range of guidance, and it expects this figure to rise this year – although the longer-term outlook is uncertain, with the firm also flagging “reduced investment into land” to help manage costs.

Persimmon projected 12,500 completions in the full year, reaching the top end of guidance.

But other companies are struggling, facing unique problems alongside the market pressures. Vistry Group said last month it expects to report a loss before tax of roughly £30 million for the first half, after “cash generation actions” such as price discounts, accelerated asset sales and impairments on certain sites.

Vistry has already issued a number of profit warnings linked to underestimating build costs, while its CEO and chief financial officer have recently departed. Investors are awaiting new CEO Adam Daniels’ review at the end of September. In the meantime credit insurer Allianz Trade limited the cover it provides to Vistry’s suppliers, according to the Financial Times.

Cash crunch

For many trying to get onto the property ladder, collecting together enough cash for a deposit remains an enormous barrier. Previously, the government offered help with part of their deposit under the Help to Buy programme, which ended in 2022.

Bellway called for “an immediate reduction in stamp duty alongside a government-backed deposit support scheme for first-time buyers” to ease affordability constraints and in turn help to deliver homes. This is “perhaps a case of if you don’t ask, you don’t get”, RBC Capital analyst Anthony Codling wrote in a note.

A review is ongoing in Burnham’s government to assess bringing back the scheme, although no decision has been made. The new prime minister spoke last month of the “housing trap” facing Britons, though focused mainly on the need for more council houses.

War impact

The US administration’s decision to attack Iran has exacerbated the affordability crunch for consumers. There has been a “moderation in customer demand since April in response to the rise in mortgage rates”, Bellway said in its trading update in July.

The cost of building houses has also vastly increased in recent years. The associated costs per house have jumped by £76,000 since 2020 as labour and material costs rose with inflation and regulatory pressures also rose, according to the Home Builders Federation.

The majority of the listed housebuilders anticipate build cost inflation of between 3 and 4 per cent for the remainder of the financial year.

Still, while the war is clearly driving inflation concerns, its long-term impact remains overshadowed by domestic factors.

“The erratic course of the Middle East conflict will also have a bearing on demand as borrowing costs fluctuate but second-round inflationary pressures have so far appeared manageable,” said Tom Bill, head of UK residential research at Knight Frank.

Red tape

For many trying to build at scale in the UK, planning has become an aggravating hurdle. Following a battle over a residential development in the South London neighborhood Peckham, Berkeley Group chairman Rob Perrins suggested that the capital was no longer a viable place to build.

“This is why developers, including Berkeley, can no longer invest in new London sites and the housing crisis continues to deepen,” he said, after the proposal had been rejected for the second time over the proportion of social housing within the development.

That sentiment is echoed across the sector. “The planning system has become more complex in the last 10 years,” said Anthony Vigor, group director of strategic partnerships at Persimmon. “A lot of the planning reform has been very welcome – national planning reform – but there hasn’t been enough change on the ground.”

The government is beginning to recognise the issue, Vigor said. Officials now need to work out “how do they cut through and actually get stuff onto site, not just through a planning committee”. BLOOMBERG