Decline of Biggest UK Housebuilder Fueled by Mortgage Plight

Britain’s mortgage crunch is reversing the fortunes of its once-biggest housebuilder Persimmon Plc, whose reliance on first-time buyers has turned from a boon into a drag on its market value.

(Bloomberg) — Britain’s mortgage crunch is reversing the fortunes of its once-biggest housebuilder Persimmon Plc, whose reliance on first-time buyers has turned from a boon into a drag on its market value. 

The firm is expected to be kicked out of the UK’s top equity index in next week’s reshuffle, ending a decade-long stay. That’s on the back of a collapse in first-time buyer deals, which now account for about a third of the developer’s customers, as the highest mortgage rates since the 2008 financial crisis and a cost-of-living squeeze hit demand.

“This has proven to be Persimmon’s Achilles heel in the current affordability crisis,” said John Choong, an equity analyst at InvestingReviews. The “potential demotion from the FTSE 100 will be at the mercy of gilt yields and where mortgage rates head next,” he added.

Read more: UK First-Time Buyers’ Hesitancy May Hit Homebuilders: BI Survey

UK households are facing an avalanche of cost pressures triggered by pricey borrowing and inflation that’s slowly dropping back from generational highs. With properties remaining out of reach for many potential buyers, the nation’s biggest developers have issued a series of downbeat statements this summer. Cladding costs and planning bottlenecks are adding to their problems. 

Persimmon, which slashed hundreds of jobs in the first half of the year in the face of weak demand, has said its forward sales dropped 30% year-on-year in roughly the first seven months of 2023. Berkeley Group Plc, which builds far fewer homes per year than its main three rivals, has felt less of a sales shock due to its focus on more affluent, London-based customers.

“The capital is of greater interest to overseas buyers, many of whom are benefiting from currency exchange rates in their favor,” said Oli Creasey, an equity research analyst at Quilter Cheviot. London “also tends to favor cash buyers given the high ticket prices and relatively low rental yields for anyone seeking to let out the property,” he added.

Read more: BI Survey: UK Househunters Keen to Buy, First-Time Buyers Pause

The end of the Help-to-Buy program this year — which stoked demand and turbocharged homebuilder profit throughout the pandemic — has squeezed the purchasing power of prospective new homeowners. In the months leading up to its conclusion, Persimmon called time on a decade of bumper payouts to shareholders, citing “uncertainty in the political and macro-economic environment.”

“Less dividend policy support, concerns of structurally declining margins and less land with planning have all conspired against the share price,” said Aynsley Lammin, a building and construction analyst at Investec. 

Persimmon, Barratt Developments Plc and Taylor Wimpey Plc, which collectively built more than 45,000 homes last year, will almost certainly complete fewer properties in 2023. “Barratt and Taylor Wimpey are clearly also seeing weaker demand but they have better land banks with more recently bought land and arguably less downside fear around margins,” Investec’s Lammin added. 

Companies benefit from being in the FTSE 100 because tracker funds have to buy their shares, while stockpickers who are benchmarked against the index also have an incentive to own them. Demotion can lead to selling as funds adjust their holdings to match the benchmark’s allocations. 

The exact stocks promoted and demoted may change between the indicative index changes and the actual announcement once European markets close on Aug. 30 — a date that could represent the start of a new era for Persimmon.

“The homebuilder may need three to five years to replenish its building sites to levels which would support a return to completions volume achieved in prior years,” said Iwona Hovenko, an analyst covering European real estate for Bloomberg Intelligence. 

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