UK homebuilder shares among worst hit by Brexit

UK homebuilder shares among worst hit by Brexit

source architectsjournal.co.uk

edited by kcontents 

By Olga Cotaga

Published: June 24, 2016

LONDON--U.K. house builders' shares took a deep plunge in early trading Friday as investors reacted to the country's decision to leave the European Union.

"We expect the U.K. house builders to be one of the sectors of the market that reacts most negatively to the Brexit vote," said Canaccord Genuity before the market opened at 0700 GMT. The broker predicted a double-digit share price fall.

Once the market opened, shares of Barratt Developments PLC (BDEV.LN), the biggest U.K. house builder by sales, fell as much as 32% to 392.40 pence, while shares of Persimmon PLC (PSN.LN), which is the largest builder by market capitalization, dived as much as 40% to 1,250 pence.

Redrow PLC (RDW.LN) was hit the most. Its shares fell 77% to 100 pence in early trading Friday.

The referendum result has taken a toll on other FTSE-100 builders as well. Berkeley Group Holdings PLC (BKG.LN) shares plummeted 39% to 2,015 pence, and Taylor Wimpey PLC (TW.LN) shares dropped 43% to 109.44 pence.

After a few hours, however, shares recovered a bit.

At 1450 GMT, Barratt and Persimmon shares were down 23% and 26%, respectively. Redrow shares were down 20%, while Berkeley and Taylor Wimpey shares were also down 19% and 28%, respectively.

The Federation of Master Builders, or FMB, urged the U.K. government "to not turn off the free-flowing tap of European migrant workers" if it wants to meet its house-building and infrastructure goals. Housing Minister Brandon Lewis said last year that the government wants to see 1 million homes being built over the next five years, meaning there should be 200,000 new homes every year until 2020.

Financial services company UBS said in a recent report that "the government's target...appears ambitious." There were 139,680 homes started in 2015, according to the department for communities and local government.

FMB said 12% of British construction workers are of non-U.K. origin.

"The majority of these workers are from EU countries such as Poland, Romania and Lithuania," the FMB said. "They have helped the construction industry bounce back from the economic downturn, when 400,000 skilled workers left the industry."

Up until now, the lack of manpower has driven building costs up for U.K. house builders.

"Given that brickies are already able to command wages of up to 60,000 pounds ($87,648) a year in London and around GBP45,000 a year in the north of England, it is clear that the skills squeeze is starting to push up costs for construction small and medium enterprises," the chief executive of the federation, Brian Berry, said in April.

Canaccord said the industry will continue to face the risks of a reduction in labor supply and increase in labor costs after the exit vote.

Other risks the sector could be facing are the rise in unemployment and the negative macro shock on U.K. gross domestic product, said Canaccord. Also, a sharp fall in net migration might affect future household formation trends, Canaccord added.

"Uncertainties remain with the outcome of the EU vote, and with such a lack of clarity we expect the sector to be sharply de-rated and to remain volatile," the broker said.

But, the broker added that "the sector is in good shape in terms of having strong balance sheets and showing capital discipline."

Monday, shares of U.K. house-builders soared as the odds of the Remain vote shortened a bit, said Aynsley Lammin, house-building analyst for Canaccord. A survey published in the Mail on Sunday showed that 45% of respondents supported the U.K. staying in the EU, compared with 42% in favor of leaving.

Liberum Capital said the mix of slowing U.K. gross domestic product, rising longer-term interest rates and political uncertainty "is like kryptonite" for house-building shares, now that the country has decided to leave the EU.

The broker predicted that stocks of those with the highest selling prices and most London exposure, such as Berkeley, Crest Nicholson Holdings PLC (CRST.LN), Barratt and Taylor Wimpey, should be the most vulnerable, and that they will fare worse than Persimmon, which doesn't have any London exposure at all.

Liberum had a Hold rating for all except Crest, for which it didn't have a rating.

Barratt said it expects a period of uncertainty as the U.K. negotiates its exit from the European Union, but added that the strong fundamentals of its business remained unchanged.

"There is a structural under supply of quality homes in the U.K., and we have a clear strategy to address this," Barratt said Friday. "We are confident our business can respond to the changing landscape and we remain focused on driving it forward."

Persimmon said: "Negotiating Britain's exit from the EU could be a long and complex process, and it is difficult today to predict how and over what timetable this process will evolve.

"Against this background, Persimmon has a strong balance sheet and a clear strategy, and we remain focused on building the new homes around the country that Britain needs," it said.

http://www.marketwatch.com/story/uk-homebuilder-shares-among-worst-hit-by-brexit-2016-06-24

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