Government’s construction pledge and falling interest rates lay solid foundations for housebuilders
News & comments5 August 2024
The UK’s housebuilding sector should face a more supportive environment if lower interest rates and a change in government usher in a new wave of construction, according to wealth manager RBC Brewin Dolphin.
The Labour Party campaigned on a pledge to build 1.5 million new homes over the next five years[1]. If that target is to be met, it would mean a 41% increase on the 212,570 new build homes completed during the 2022-23 financial year[2].
Rising interest rates during 2022 and 2023 had put pressure on housebuilders, as mortgage rates rose, and fewer people moved house. Average mortgage rates on a two-year fixed mortgage nearly doubled from 2.6% in 2021 to 5% last year[3].
However, a first cut to base interest rates from the Bank of England and inflation falling to 2% in May and June could mean the tide is beginning to turn – albeit at a slower rate than many analysts had expected earlier in 2024.
John Moore, senior investment manager at RBC Brewin Dolphin, said: “Housebuilders had a torrid 2023 in challenging macroeconomic conditions, but unlike in 2008 they were well capitalised and the sector weathered the storm relatively unscathed – at least at the larger end of the market. Now, with a government committed to building new homes and interest rates being cut to 5%, the picture looks a lot more positive.
“There have, however, been a series of changes, with Barratt buying Redrow and Bellway acquiring Crest Nicholson, alongside a series of smaller businesses having to fold or merge. Cala is also up for sale and all these developments combined have made for a much more consolidated sector.
“Housebuilding is increasingly about scale, demonstrated by what has happened in the industry over the past couple of years. That could marginalise some of the smaller players – so we would recommend taking advice before making any significant decisions about investing in the sector.
“There are also a range of supply chain businesses that are UK-listed but have largely been passed over in recent years, which may be worth looking it. But, while on the face of it, housebuilding may look to be an attractive area for investment, we would only suggest holding companies in the industry and its supply chain as part of a much wider, diversified portfolio of assets.”
Housebuilders
Berkeley Group – John Moore said: “Berkeley is a quality name in the housebuilding sector. It typically focusses on mixed-use developments, which helps to manage the risk of any downturn in demand for housing. Preferring growth of its book value overpaying dividends out, it has never been a great yielder but has tended to be less volatile than many of its peers.”
Persimmon – John Moore said: “Persimmon has long been seen as the blue-chip choice in the sector. The company cut its dividend hard on the back of slowing sales last year, but it still yields relatively well. If Persimmon is successful in its bid for Cala, it will add another string to its bow with more exposure to the premium market and more geographic spread within the UK.”
Suppliers
Howden Joinery – John Moore said: “The UK’s number one trade supplier of kitchens in the UK, Howden has an excellent track record and network reach throughout the country. The business is entrepreneurially run and should be well placed to deal with the changing demand landscape and, in particular, the overspill onto the refurbishment market.”
Marshalls – John Moore said: “Marshalls is a FTSE 250-listed construction supplies company, providing materials for the housebuilding and landscaping markets. The business occupies a strong position in the UK and is generally well managed, but its shares have suffered in recent years, as construction activity struggled. Its shares have rallied since the election of the new government, with plenty of room for further growth.”
Breedon Group – John Moore said: “Breedon is a construction materials company, with significant operations in aggregates, asphalt, and cement. The company has quietly climbed to FTSE 250 status over the last decade or so, after a series of acquisitions, and it forms a crucial part of the UK’s supply chain for raw materials.”
Ibstock – John Moore said: “Ibstock is a building products business and is best-known for producing bricks. Like many construction supplies companies, it has largely flown under the radar during a subdued period for the industry. But, its shares have risen on the back of the new government’s plans – and if those plans come through and are sustained over a prolonged period, then there could be further opportunities for the company.”
Disclaimers
The value of investments can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. VAT number: 365345640.
– ENDS –
PRESS INFORMATION
For further information, please contact:
Peter McFarlane: peter.mcfarlane@framecreates.co.uk / Tel: 07412 739 093
Siân Robertson: Sian.Robertson@brewin.co.uk / Tel: +44 (0) 20 3201 3026
Payal Nair payal.nair@brewin.co.uk / Tel: +44 (0) 20 3201 3342
NOTES TO EDITORS
About RBC Brewin Dolphin
RBC Brewin Dolphin is one of the UK and Ireland’s leading wealth managers and traces its origins back to 1762. With £57.1bn* billion in assets under management, we offer award-winning, bespoke wealth management services, including discretionary investment management and financial planning.
Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients’ needs at the core.
As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.
*as at 30th April 2024.
Disclaimers
The value of investments can fall and you may get back less than you invested.
RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. VAT number: 365345640.
About RBC
Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 94,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada’s biggest bank and one of the largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our more than 17 million clients in Canada, the U.S. and 27 other countries. Learn more at rbc.com.
[2] Source: UK Government
[3] Source: Mortgageable