U.K. Home-Builder Stocks May Be a Buying Opportunity as the Pound Tanks
They say an Englishman’s home is his castle. It’s also a disproportionate amount of his net worth, which should make buying shares of companies that build new homes a relatively safe bet.
U.K. house prices have quintupled since 1992. That’s significantly more than in the U.S., where prices have quadrupled over the past 30 years. The strong growth shows the power of demand for homes in Britain, especially when so much of the country’s housing stock consists of small, damp Victorian dwellings.
Nevertheless, some of the country’s biggest builders— Persimmon (ticker: PSN.UK), Barratt Developments (BDEV.UK), and Taylor Wimpey (TW.UK)—have been among the FTSE 100’s worst performers in 2022, all down about 50%. Tack on the pound’s steep depreciation against the dollar this year, and the declines look even worse.
Yet all three companies are profitable and are returning money to shareholders, boasting dividend yields of around 10% or more.
The reason for the rough ride comes down to rising interest rates. The Bank of England started lifting its benchmark from close to zero in December to 2.25% today. Economists see it rising to at least 4% before the central bank eases off the gas.
That’s a tough blow for borrowers who have already seen mortgage rates double this year. In the U.K., homeowners typically refinance every two to five years—banks tend to offer steeply discounted rates for the first few years of a home loan before reverting to a higher one, encouraging customers to swap deals relatively frequently. That was a boon for borrowers between the 2008-09 financial crisis and last year.
This year saw a sudden reversal. On Sept. 23, the new government under Prime Minister Liz Truss inadvertently sent the pound, along with U.K. stocks and bonds, plunging by unveiling a new budget that included a raft of tax cuts. It was a bid to boost growth that markets didn’t find credible. As the turmoil unfolded, domestic newspaper headlines focused on mortgage lenders pulling products and jacking up rates at jaw-dropping speeds, further hurting home-builder shares.
Persimmon has a market value of 4.2 billion pounds sterling ($4.8 billion). It fetches 5.9 times this year’s expected earnings and trades at a 10% premium to its peers. Shares are down 56% this year to £12.71. It boasts a dividend yield of 18.1% and receives a Buy rating from eight out of 14 analysts on FactSet.
Barratt Developments, with a market value of £3.3 billion, fetches 5 times this year’s earnings and is valued in line with peers. Shares are down 53% this year to £3.55. Eight of 13 analysts on FactSet rate it a Buy, and its dividend yield is 10.4%.
Taylor Wimpey, with a market value of £3.2 billion, trades at 5.2 times forward earnings, in line with its peers. Shares are down 46% this year to £0.94. Its dividend yield is 9.7%, and nine of 12 analysts rate it a Buy on FactSet.
Higher interest rates, rising unemployment, and the prospect of a recession will almost certainly dent U.K. house-price growth in the coming year—some analysts predict the first annual drop in prices since the financial crisis. But there are some bright spots.
Truss promised to loosen planning laws to speed up new housing developments. One of the tax cuts was on stamp duty, a levy paid by buyers in home transactions. Truss earlier capped household energy bills, which should make it easier to make mortgage payments with inflation running in the double digits.
U.K. home builders may not be out of the woods yet. But it’s also conceivable that prospects improve dramatically in the near future.