Two FTSE 100 housebuilders, but two very different performances.
Half-year numbers from Persimmon PLC (LSE:PSN) saw revenues fall by 8% to £1.69bn, profit before tax down 8.4% to £439.7mln and completed home volumes tumbling by nearly 1,000 to 6,652 when compared to the same six-month period last year.
The group blamed much of this on macro-conditions, such as COVID-19, Brexit, the war in Ukraine which all disrupted supply chains and increased costs.
And while it reiterated guidance for home completions of between 14,500-15,000, adding sales inflation is mitigating cost inflation, its performance and outlook are dwarfed by competitor Barratt Developments PLC (LSE:BDEV), which was much more bullish.
A trading update issued last month saw homes completed ahead of last year and returning to pre-pandemic levels of 17,908.
The group expects profit before tax to be ahead of the current market consensus when it releases its full-year results at the start of next month, in the region of £1.05bn and £1.06bn.
The performances and expected performances of the two firms, which are both impacted by the same macro-conditions, would suggest one is doing something extremely wrong, or the other is doing something extremely right.
State of the housing market
Much of the discussions around the housing market this year so far involved the rising average house prices.
Up until June, house prices had continued to grow, hitting record high after record high.
However, while the prices continue to climb, the rate of that growth has slowed down.
In the year to June, house prices grew by 7.8%, down from the 12.8% growth experienced in May.
Not only that, but new buyer enquires also fell for the third month in a row in July, according to data from the Royal Institution of Chartered Surveyors, representing the longest stretch of falling demand since the start of the pandemic.
All this suggests that demand for homes is falling as inflation and the cost-of-living crisis bites would-be buyers.
“Skyrocketing house prices are likely to feel the pull of gravity from the escalating cost of living crunch come autumn, with the impending rise to the energy price cap set to further fuel inflation and the spectre of higher interest rates to combat rising prices upping borrowing costs,” said Myron Jobson, senior personal finance analyst at interactive investor.
What does this mean for housebuilders?
According to Sam Cullen, an equity research analyst at Peel Hunt, slowing growth rates and new buyer inquiries shouldn’t be too much of a concern to housebuilders, at least in terms of demand and prices holding up.
“The outlook for house price growth is probably worsening versus where it was, but we’re still in historically low levels of inventory, high levels of rental growth and low levels of homeownership, relative to those that want to own their own home.”
“Therefore, the attraction of ownership is still pretty high, and that should support prices.”
“Do I think prices are going to accelerate past an annual growth rate of 11% annually? Probably not. Will they be going sharply into reverse? Also, probably not.”
So, why the different performances?
Cullen believes that much of this traces back to the pandemic and the different approaches taken by the two housebuilders in that period of unusual market conditions.
“Persimmon, at the margin, kept more of their sites open during the lockdown and the immediate period post lockdown and built more properties.”
As a result, it sold more properties in the immediate aftermath relative to the sector, meaning last year’s figures were inflated due to them taking a different approach in that period.
Furthermore, the fact it continued to sell during that period left it short on stock now compared to Barratt.
This short availability of plots, land and housing for Persimmon is only further compounded by it currently being “very difficult to get land for planning at the moment for a variety of reasons.”
Chris Spearing, a real estate analyst at Liberum echoes this view on planning.
“One of the biggest challenges for housebuilders is on the supply of new homes because of the planning system.”
“Persimmon, we’re talking about the fact that they’re going to struggle to meet their volume targets because they don’t have as many sites with planning permission that can be built out immediately.”
Barratt, on the other hand, “had a steadier build-up approach to site opening,” said Cullen.
Consequentially, it is better equipped and has more available stock to sell, but also comparative figures aren’t as inflated as is the case with Persimmon.
Spearing also notes Barratts acquisition of Gladman, a land promoter, in January this year.
Retaining a lot of the expertise Gladman had to offer “gave Barratt greater visibility on their supply pipeline.”
What it boils down to for these two housebuilders is decisions made at the start of the pandemic.
Persimmon pushed through and continued to keep sites open, and benefitted from sales immediately after.
Barratt took a longer approach and carefully managed the number of properties it decided to build and sell.
With planning permission much harder to attain according to analysts, Persimmon may struggle to reach their forecasts, while Barratt seemingly has a safety buffer by holding back during the COVID years.