LONDON: British homebuilders are set for their worst weekly performance since before the first UK lockdown in 2020 under the weight of discounted stock placements, a weak trading update the government ordering companies to pay to remove flammable material from buildings.
Most analysts had positive 2022 outlook for homebuilders amid a broadening economic recovery, but the negative news flow pulled the FTSE 350 household goods and home constructors index down around 10% this week, to its lowest levels in three months. It fell 3% on Thursday.
Shares of top homebuilder Barratt Developments Plc and No. 3 player Taylor Wimpey fell around 9% each this week with their discounted share placements spooking investors.
Other FTSE builders, including Persimmon and Countryside Properties have also started the year on the wrong foot.
UK’s second-largest homebuilder Persimmon was the top loser among London blue chips on Thursday despite the company saying it expected higher profit margins in 2021. J.P. Morgan said volumes of houses built were slightly softer than expected.
Countryside Properties shares fell around 20% after it warned its first-quarter performance missed expectations and announced its chief executive’s immediate departure.
“The sector has been weak on a combination of cladding, ongoing supply chain concerns and sickness absenteeism among workers,” said Jeremy Leung, a portfolio manager at UBS Asset Management.
Britain ordered homebuilders to pay around $5.4 billion to help remove dangerous cladding from buildings following a deadly 2017 London fire, which revealed the widespread use of cheap flammable cladding on apartment blocks.
The additional cost is weighing on stocks, Leung said.
UBS calculated the cladding costs amounted to a tenth of the entire sector’s market capitalization, though could be lower if the government announces tax breaks for those companies, it added.
Britain’s housing market showed resilience during the pandemic, helped by government support measures for buyers and low mortgage rates. Indeed, London-listed homebuilders outperformed the pan European real estate index since early 2020.
Despite the end of a property tax break for buyers in September, most investors say the sector’s outlook remains strong. Citi, for example, expects capital returns to jump above pre-pandemic levels over the next two years.
Charlie Campbell, investment analyst at Liberum said increasing home prices will offset build cost inflation, and rising wages will cover higher mortgage costs.
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