December 9, 2023

They say that an Englishman’s house is his palace. It’s also a disproportionate amount of their net worth, which should make buying shares of companies that build new homes relatively safe bets.

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The prices of UK homes have more than fivefold since 1992. This is significantly higher than in the US, where prices have quadrupled in the past 30 years. Strong growth reflects the power of demand for homes in the UK, especially as the country’s housing stock consists of small, moist Victorian housing.

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Still, some of the country’s biggest builders—Persimone (ticker: PSN.UK), Barrett Developments (BDEV.UK), and Taylor Wimpey (TW.UK)—are included in the FTSE 100.‘s
The worst performers in 2022, all down nearly 50%. With the pound dealing with a massive depreciation against the dollar this year, further declines look even worse.

Yet all three companies are profitable and returning money to shareholders, claiming dividend yields of about 10% or more.

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The reason for the rough ride is rising interest rates. The Bank of England began raising its benchmark from near zero in December to 2.25% today. Economists see it rising to at least 4% before the central bank shuts down gas.

It’s a tough blow for borrowers who have already doubled mortgage rates this year. In the UK, homeowners typically refinance every two to five years—banks offer heavily discounted rates for the first few years of home loans before moving back to higher loans, giving customers relatively frequent- Swap bar deals are encouraged. It was a boon for borrowers between the 2008-09 financial crisis and the previous year.

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There was a sudden turnaround this year. On 23 September, the new government under Prime Minister Liz Truss inadvertently replaced the pound with UK stocks and bonds, by unveiling a new budget that included tax cuts. This was a bid to spur growth that the markets did not find credible. As the turmoil unfolded, home newspaper headlines focused on mortgage lenders pulling products and raising rates at jaw-dropping pace, further hurting home-builder stocks.

The market value of the persimmon is 4.2 billion pounds sterling ($4.8 billion). It receives 5.9 times this year’s expected earnings and trades at a 10% premium to its peers. Shares have fallen 56% this year to £12.71. It boasts a dividend yield of 18.1% and has a Buy rating from eight out of 14 analysts on FactSet.

With a market cap of £3.3 billion, Barratt Developments receives 5 times this year’s earnings and is valued in line with peers. Shares have fallen 53% this year to £3.55. Eight out of 13 FactSet analysts rate it a buy, and its dividend yield is 10.4%.

Taylor Wimpey, with a market cap of £3.2 billion, trades at 5.2 times forward earnings, in line with its competitors. Shares have fallen 46% this year to £0.94. Its dividend yield is 9.7%, and nine out of 12 analysts rate it a buy on FactSet.

Higher interest rates, rising unemployment, and the prospect of a recession will certainly affect UK home-price growth in the coming year – with some analysts predicting the first annual fall in prices since the financial crisis. But there are some bright spots.

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The truss promised to loosen planning laws to speed up new housing development. One of the tax deductions was on stamp duty, a levy paid by buyers in domestic transactions. The truce previously capped household energy bills, which should make it easier to make mortgage payments with inflation running in the double digits.

UK home builders may not be out of the woods just yet. But it is also conceivable that the prospects will improve dramatically in the near future.