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UK housebuilders are heading for steep declines in annual profits as higher mortgage rates hit the market for new homes, raising concerns the industry will be forced to cut jobs and further reduce dividend payouts.
In the latest in a series of gloomy updates from the sector, Crest Nicholson this week issued a profit warning after it only sold about half as many properties this summer as it had hoped. The Surrey-based developer now expects pre-tax profits excluding exceptional items to drop 64 per cent to £50mn in the year to the end of October.
Its rival Taylor Wimpey is on track for a decline in full-year operating profit of as much as 52 per cent, and Persimmon a halving of its pre-tax profits.
David O’Leary, executive director at the Home Builders Federation, said it was a “perfect storm” for the sector. He noted that borrowing costs had risen just as the government this year withdrew its Help to Buy scheme, which offered state-subsidised loans for first-time buyers.
To protect short-term profitability, several companies are reining in costs and some — including Crest Nicholson — are considering job cuts.
Several are also cutting dividends: Persimmon slashed its payout 75 per cent this year, while analysts expect Barratt, another developer, to make a cut when it reports annual results in September.
The big question in the industry is how long the downturn will last. While homebuilders have not resorted to lowering sale prices, analysts warn they could yet be forced to do so if weakness in the UK economy persists or interest rates remain at elevated levels for a protracted period.
House prices across the country have remained relatively resilient in the face of higher interest rates, thanks in part to cash buyers. Figures from lender Halifax show they edged down only 0.3 per cent on a monthly basis in July.
Taylor Wimpey said its average selling price rose 6.7 per cent year-on-year to £320,000 over the six months to June 30.
Peter Truscott, chief executive of Crest Nicholson, said it was “very unlikely” housebuilders would slash prices, given the high cost of acquiring land. “It’s far more likely that we and others will seek to retain price and let volumes fluctuate,” he said.
Oli Creasey, analyst at Quilter Cheviot, said developers would “rather hunker down through a market slowdown”. “You only sell anything once — you don’t get a second chance at it.”
However, he warned: “If you start to see interest rates and unemployment move up, that’s where the risk of pricing starts to come back on the radar.”
For now, analysts expect profits across the industry to flatline next year. Any rebound is unlikely until the second half as mortgage costs are forecast to remain high.
The average two-year fixed residential mortgage rate stands at 6.7 per cent, according to Moneyfacts, not far off the highest level in 15 years. Most analysts do not expect the rate to fall below 5 per cent this year.
“The second half of this year is basically written off” for housebuilders, said Aynsley Lammin, analyst at Investec.
Larger housebuilders are also under increased regulatory scrutiny. The competition watchdog on Friday said it would investigate whether the concentration of land ownership among a small number of housebuilders is slowing the development of new homes.
The watchdog said it would also probe whether smaller housebuilders are at a competitive disadvantage when it comes to holding land.
Smaller house building companies, typically unlisted family-owned businesses, have felt the broader industry pressures more acutely. A Home Builder Federation survey of more than 200 smaller companies in the sector in July found that 93 per cent had considered scaling back construction in recent months.
Planning constraints remain a bugbear for housebuilders who say that securing local authority approval is too difficult and time-consuming, adding to their costs. In a letter in July to housing secretary Michael Gove, the federation warned that smaller companies were “struggling to cope under the increasing weight of bureaucracy”.
The federation said Gove was “hostile” to housing construction and raised doubts over ministers’ abilities to reach the target of building 300,000 new homes a year by the mid-2020s.
Analysts said bigger homebuilders were better placed to withstand the slowdown thanks to stronger balance sheets, with companies including Taylor Wimpey enjoying net cash positions. But the worry is that a longer downturn could drain these resources.
Cost cuts are one obvious way for the industry to shore up profitability. Crest Nicholson’s Truscott said his company, which employs about 800 people, was “looking quite closely at the overall cost base”, including the possibility of lay-offs.
But the Home Builders Federation warned that job cuts risked having long-lasting impact on a sector that relies on an ageing workforce. Training housebuilders is time-consuming and expertise is built up over decades, according to the trade body.
Dean Finch, chief executive of Persimmon, said the York-based company was “hunting the ledger to keep a tight control of costs day in, day out”. However, he added: “What I absolutely don’t want to do, in our hunger to control costs, is to impede our ability to grow back quickly when the market recovers.”
One glimmer of hope for the sector is building materials inflation, which has abated after a spike in the wake of Russia’s invasion of Ukraine. The annual rate of increase for input costs in the sector has slowed from about 10 per cent last year to about 4-5 per cent.
But that relief will not be enough to offset the hit to profits this year. “The question is no longer how bad is 2023 going to be,” said Creasey. “It is now, ‘How long is it going to last?’”