Record house prices, record results — and roughly £5bn wiped off housebuilder shares since early January. It hurts to own the listed property developers right now.
Not, of course, as much as it hurts to be a leaseholder trapped in an unsellable property thanks to a building safety scandal that has dragged on far too long, or facing a bill of up to £15,000 because the owner cannot afford to pay for repairs.
The damage housing secretary Michael Gove has done to housebuilder share prices since announcing plans in January to raise £4bn from the industry is the consequence of a government only belatedly getting to grips with the cladding fire safety crisis.
But it is striking that the collective loss of market capitalisation of the nine large listed housebuilders exceeds the government’s target for how much it wants to raise to fund remediation and repairs — even after measures announced on Monday that will seek to recover more from cladding manufacturers.
Some of the drop is due to market fluctuations. It has been a turbulent start to the year in equity markets. Housebuilders are cyclical stocks, and headwinds abound. There are changes to building regulations and new environmental standards that will push up costs, the looming end of the Help to Buy government subsidy scheme, the impact of higher interest rates, and the squeeze on real wages and a potential knock-on effect on mortgage availability, notes Shane Carberry of broker Goodbody.
Still “the sector could probably deal with all four of these issues in a relatively short timeframe”, Carberry reckons. House price growth and resilient demand blunt the impact of cost increases. The industry has been preparing for the end of Help to Buy for years now.
But then there is cladding. Not all the £5bn or so in value that developers have shed since Gove took a sledgehammer to relations between government and industry on January 10 is thanks to cladding costs. UBS analysts estimate housebuilder shares have lost roughly £1.9bn more in value than can be explained by wider market moves. Until shares improved somewhat over the past week, it was more like £2.9bn.
Who will end up paying what on cladding is still unclear. It should become more clear next month, the deadline Gove has set for a fully-funded plan. For now, provisioning is a mess. There are those builders who have provided for both buildings they built themselves and ones they contracted out, but only for a limited warranty period. There are those whose provisions cover a longer period of time, but only for buildings they built. There are those who have so far provided only for fixing the tallest buildings. There are those who haven’t disclosed much about their approach to provisions at all.
Investors fear another blanket tax. The companies are already on the hook for an extra 4 per cent tax on profits above £25mn from April as part of a plan to raise £2bn for cladding related repairs over 10 years. The unknown is how much of the cost of Gove’s £4bn building safety fund the listed developers will have to bear. The sector-wide share price drop implies that it will be at the very least a significant amount, maybe most of it.
That means anything less than that should be a boon. Analysts argue that potential cladding costs are now more than priced in, assuming they are recouped over a decade or so. Chris Millington at Numis last week argued “we are at the point of maximum fear” on cladding costs. HSBC said last month the sector was “deeply undervalued and with surplus cash”. Almost all the large developers trade below their long-term average multiples on either earnings or book value metrics, according to Goodbody analysis.
Analysts are optimistic about the prospect for persistently high house prices and sales volumes. There is an argument that the pandemic has structurally shifted demand towards the type of three and four bedroom houses in regional areas that many of the large developers specialise in.
But the broader question is whether Gove’s less accommodating approach — including a pause on planning reforms — marks the breakdown of a relationship between government and the industry that has handed the housebuilders huge profits over the past decade. An unpredictable tax burden hardly builds a solid foundation for the housebuilders’ investment case.
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