viewCrest Nicholson

UK housebuilders feel the pinch as sector stagnation pressures margins

Despite a contrasting set of numbers today from Crest Nicholson and Bellway, there remains similarity regarding the housing markets’ slowdown and its effect on their balance sheets

House builder
Crest and Bellway have both seen their margins squeezed

Two of the FTSE 250’s housebuilders, Crest Nicholson Holdings PLC (LON:CRST) and Bellway PLC (LON:BWY) have reported financial results this morning, for the full year and in a third quarter trading update respectively.

Despite what was considered a disappointing set of results for Crest and a relatively mixed picture for Bellway, a strand of similarity in terms of the housing markets’ slowdown and its effect on their balance sheets was pervasive.

READ: Crest Nicholson shares crumble as profits dip and margins contract in first half

Crest Nicholson was the disappointment of the pair as its pre-tax profits declined by 2% despite a 13% increase in revenues as higher costs, a flat pricing structure, and build cost inflation pushed its margins down to 17.2% from 19.1% a year ago.

And it doesn’t look like the market is expecting Crest’s fortunes to improve soon either, with Artjom Hatsaturjants, research analyst at Accendo Markets, saying the downturn in the UK housing sector (with Halifax’s latest house price data for May showing a “very soft” market) makes it unclear whether the housebuilders outlook will improve substantially.

He added that the company’s statement that cost inflation was “showing signs of moderation” was almost an admission that Crest’s fortunes were at the mercy of macroeconomic market trends and that the company wasn’t proactively trying to halt rising costs.

On the other hand, Bellway was for all intents and purposes positively buoyant in comparison, reiterating its record-breaking projection of 10,000 homes to be built by the end of its financial year.

The company also said that since February, it had achieved 233 reservations per week, up from 221 in 2017, while its order book value as of 3 June stood at £1.7bn, a 7.8% increase on 2017.

READ: Bellway reiterates 10,000 home target as trading environment remains favourable

However, Bellway also suffered from the same margin squeeze that was affecting its FTSE 250 rival, with analysts at broker Shore Capital commenting that Bellway’s margin of 22% was slightly weaker than expected and that a “cautious tone” on pricing in the company’s trading update indicated "more pressure and a greater use of sales incentives (prices cuts in effect)".

The bleak picture for housebuilders is the latest in a series of what seems to be an increasingly stagnant UK housing market, with the latest data from the largest mortgage lender, Halifax, revealing only a slight increase in house prices of 1.9% in May when compared to the same period in 2016.

Following years of rapid increases in house prices, especially in London, the market is now facing an unusual ‘catch-22-esque’ situation wherein buyers are consistently priced out of the market while sellers maintain high expectations after years of price rises, thus dampening demand while simultaneously restricting supply.

The macro picture was also evident in the share prices, with Crest and Bellway falling 6.5% to 416.8p and 2.6% to 3,320p respectively in late-morning trading Tuesday.

And it seems an element of contagion is afoot in the markets, with fellow housebuilders Persimmon PLC (LON:PSN) dropping 1.6% to 2,814p and Redrow PLC (LON:RDW) falling 2.8% to 594.5p.

While the post-Brexit housing slow-down shows little sign of an increased decline, it doesn’t show many signs of recovery either, with housebuilders, buyers, and sellers potentially settling in for a long period of stagnation.

Quick facts: Crest Nicholson

Price: 399.6 GBX

Market: LSE
Market Cap: £1.03 billion

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