What next for housebuilding shares as big names reveal updates?

Investors in UK homebuilders and construction suppliers face a crucial month of key reporting dates as companies reveal how they fared in a rocky start to 2023.

Homebuilders have endured a decade of expansion and faced the double whammy of skyrocketing construction costs and a sharp decline in buyer readiness amid skyrocketing mortgage rates and a cost-of-living crisis.

Builder Watkins Jones stock plummeted on Tuesday, as the company revealed first-half losses. mainly related to severance costs, pushing share price losses to more than 20 percent by 2023.

Building materials giant Kingfisher will report on Wednesday, followed by homebuilders Crest Nicholson and Bellway, while Henry Boot’s annual general meeting is due on Thursday.

Housing stocks thrived in the years following the global financial crisis as they recovered from their lows.

An index tracking the industry grew more than 250 percent from 2009 to a tough year 2022, culminating in the now-infamous mini-Budget under then Chancellor Kwasi Kwarteng.

In the fall mini-budget, homebuilders bottomed out as investors faced a looming sharp rise in mortgage rates amid worsening inflation.

However, residential builders have outperformed over the past month with a gain of 2.9 percent compared to the FTSE 100’s 2 percent loss and flat performance of the FTSE 250.

Analysts from Peel Hunt said: “Better news from the housing market… has supported the continued outperformance of homebuilders over the past month as values ​​continue to fall towards [Tangible net asset value].’

Busy four weeks for homebuilder investors

Homebuilders have been buoyed by claims of ‘green shoots’ of recovery for the real estate market.

Meanwhile, real estate indices are slightly more optimistic. The average asking price rose 1.8 percent this month, rising from £6,647 to £372,894, according to the Rightmove house price index. This was the biggest monthly jump this year.

Meanwhile, some experts suggest that mortgage rates have peaked despite base rates continuing to rise

Employment data, another key indicator for the housing market, has also so far proved more resilient than some might have feared.

Grant Slade, senior equity analyst at Morningstar, said: ‘UK homebuilder share prices have partially recovered in recent months.

“However, UK housing stocks are still trading at low book value multiples, raising the question of whether the housing market will eventually recover from the current cyclical trough, and more generally from the long-term fundamentals of the housing sector.”

However, more worrying data for investors came from the Office for National Statistics earlier this month.

The ONS says new orders for private homes were among the biggest drag on the construction industry in the first quarter, contracting by 18.4 percent.

The private housing sector has experienced a slowdown since late 2022 with five monthly declines from the last seven, according to the ONS.

Construction cost inflation has fallen from a peak of more than 15 percent in the second quarter of last year to about 12 percent by the end of 2022, according to the BCIS Private Housing Construction Cost Index, but industry costs remain high.

Partner and national head of construction at RSM UK Kelly Boorman said: ‘In the private housing sector, we expect some improvement in the coming months in response to 100 per cent mortgage returns and stabilization in energy prices.

“As such, there is some optimism in the industry about procurement processes and market prices, supported by the stabilization of materials and the return of migrant workers, ensuring continuity in pipelines.”

Mr Slade agreed, ‘the long-term outlook for the UK’s big house builders looks bright’, with Morningstar choosing Persimmon as the best choice in the industry.

The analyst says:[Persimmon] remains well positioned in the lower end of the housing market over the long term and trades at an attractive 40% discount to our [2,300p] fair value estimate.

‘Persimmon is unique among its major homebuilders, targeting first time homebuyers in the lower end of the housing market, where it is delivering homes well below the average UK house price.’

Private housing construction has slowed in recent months