Victoria Scholar: The economic clouds are parting – for housebuilders, at least
Victoria Scholar is head of investment at interactive investor and writes a fortnightly notebook for City A.M.
In a surprise announcement, Britain’s largest homebuilder Barratt Developments has offered to buy smaller FTSE 250 rival Redrow in a £2.52 billion deal. The announcement skyrocketed shares in Redrow, while Barratt extended its year-to-date declines. The new ‘Barratt Redrow’ aims to achieve aggregate revenues of £7.45 billion and annual cost synergies of £90 million by year three.
The fact that these two have decided to join forces highlights the challenges facing the sector recently from the shaky economic backdrop, higher for longer interest rates and cost inflationary pressures. Housebuilders have been battling against squeezed mortgage affordability, lacklustre customer demand and weak consumer confidence. On top of that, the removal of the Help to Buy scheme has also made life more difficult for first-time buyers.
However, it looks as though the clouds could at least be starting to part for the sector this year. Shares in Barratt and other housebuilders staged impressive gains during the final stretch of 2023 off the November lows, pricing in hopes that the Bank of England would begin cutting interest rates this year, providing a boost to mortgage affordability and housing demand. But with the Bank of England making us wait a little longer, price action for Barratt has been more challenging at the start of 2024, under pressure after a period of overexcitement.
Analysts largely remain on the fence in terms of the outlook for Barratt Developments with 10 hold recommendations on the stock versus 5 buys and 1 sell. Its latest six-month results showed some signs of strain with adjusted pre-tax profit down 70% to £157 million and revenue falling by 33.5%. However moderating build cost inflation should help to ease some of the pressure on margins. While Barratt reduced its dividend again, the yield of 5.3% remains robust. All eyes turn to the crucial Spring selling season for clues into the potential for a turnaround for the sector.
Going grey
According to The Pensions and Lifetime Savings Associations (PLSA) the moderate income required in retirement for a single person has gone up by £8,000 in a year to £31,300 amid cost-of-living pressures. The minimum is £14,400 while a comfortable retirement requires £43,100. Nigel Peaple, director policy and advocacy at the PLSA said, “The cost of living has put enormous pressure on household finances over the last year and, as the research shows, this is no different for retirees.”
WeWorking it all over again
Adam Neumann, founder of collapsed office rental company WeWork is trying to buy the business back out of bankruptcy five years after he was ousted from the company. He is reportedly aiming to purchase the business with support of hedge fund billionaire investor Dan Loeb. WeWork went bankrupt after the shift towards working from home contributed to billions of dollars of losses for the company. WeWork’s valuation peaked at $47 billion privately, but it IPOd only with the help of a SPAC. According to the New York Times which first reported the potential deal, WeWork has more than $4 billion in debt.
House price hikes
According to Halifax, UK house prices rose by 2.5% in the year to January, the strongest annual growth rate in a year. A recent fall in mortgage rates and rising real wages have helped to drive house buyers back to the market at the start of 2024.
A recent fall in mortgage rates and rising real wages have helped to drive house buyers back to the market at the start of 2024.
The Bank of England is expected to cut rates this year, potentially providing a tailwind to the housing market which has been grappling with weak demand amid the cost-of-living crisis and expensive mortgage rates.
Listen in
Over the past couple of weeks my colleague Kyle Caldwell has been interviewing a range of fund managers on interactive investor’s On The Money podcast, which is available on all the major podcast apps. He caught up with Carlos Hardenberg, who manages Mobius Investment Trust, to find out why he has very little exposure to China, but is much more positive on the prospects for Taiwan, India and South Korea. Kyle also chatted to David Smith, of Henderson High Income, to hear about how he has been approaching investing in consumer stocks during the cost-of-living crisis. Meanwhile, in this week’s episode Kyle is joined by Gary Robinson, who manages Baillie Gifford American and Baillie Gifford US Growth Trust. The duo discusses whether the dominance of a small number of technology stocks makes the S&P 500 harder to beat.