​​​Barratt Developments, Bellway and Redrow earnings/trading statement to shed light on UK housing market

​​​UK housebuilders still face significant headwinds but there is a silver lining

​UK housebuilders like Barratt Developments, Bellway and Redrow are facing significant headwinds in the form of high interest rates, planning delays, and slowing demand. Barratt's CEO David Thomas in late 2023 acknowledged that market conditions will likely remain difficult early this year, even though Barratt itself has a strong balance sheet with £1 billion in cash reserves as of fiscal year-end.

​The high interest rate environment has made mortgages more expensive, hitting completions at Barratt. Management says it could take two more years for the housing market to recover, leading Barratt to maintain its recruitment freeze and use targeted sales incentives while tightly controlling costs.

​Besides falling completions, Barratt and other major housebuilders are struggling to acquire new land sites due to planning delays. A report from Close Brothers Property Finance, the Home Builders Federation, and Travis Perkins reveals planning remains a major barrier for small and medium enterprise (SME) homebuilders as well, with 46% seeing a 30%+ increase in planning permission costs over the past three years. This comes before recent hikes of up to 35% in planning fees.

​The surge in interest rates has also severely impacted SME builders, cited as a top barrier by 72%. However, fewer SMEs see material and labour supply and costs as major obstacles compared to last year, suggesting some easing of pandemic-related supply chain disruptions. SME builders are also advancing sustainable construction, like using modern methods of construction.

​While conditions are difficult currently, some analysts see potential for institutional investors to spark a housebuilding boom in the UK. The residential property market has exhibited far lower volatility and stronger returns versus commercial real estate over the past decade. Major global investors like Blackstone, Carlyle, and Lloyds are taking notice, acquiring rental portfolios from volume housebuilders.

​Institutional ownership remains low at just a few hundred thousand units, versus countries like Germany where a third of rentals have professional owners. Successive tax changes have made small-scale buy-to-let investing less attractive in the UK, weighing on builders reliant on that source of demand. Institutional funding could help sustain volumes and support the government's target of 300,000 new homes annually.

​Demand for rented accommodation is robust, with occupancy rates near 100% and rents up 8% last year for major landlord Grainger. Declining property prices also make yields of 4-5% attractive versus commercial real estate. Institutional investor interest is notable in single-family rentals, with over £1 billion deployed last year.

​In conclusion, while headwinds persist for UK housebuilders today, increasing institutional investment into rented homes could provide a valuable new source of demand in the coming years as interest rates in the United Kingdom are forecast to significantly decline.

​Barratt Developments, Bellway and Redrow analyst recommendations

​Refinitiv data shows a consensus analyst rating of ‘hold’ for Barratt Development with 2 strong buy, 3 buy, 11 hold and 1 sell – and a mean of estimates suggesting a long-term price target of 558.73 pence for the share, roughly 7% higher than the current price (as of 6 February 2024).

​For Bellway the consensus analyst rating is far more positive and is given as a ‘buy’ with 5 strong buy, 7 buy, 2 hold and 1 sell – and a mean of estimates suggesting a long-term price target of 2,856.77 pence for the share, roughly 5% higher than the current price (as of 6 February 2024).

​Analysts are also more positively inclined towards Redrow with a consensus analyst rating of ‘buy’ with 4 strong buy, 5 buy, 4 hold and 1 sell – and a mean of estimates suggesting a long-term price target of 664.5 pence for the share, roughly 12% higher than the current price (as of 6 February 2024).

​Barratt Development, Bellway and Redrow year-to-date performance

​Bellway is the clear outperformer year-to-date with its share price rising by over 7%, and by around 35% from its October low, whereas the Barratt Developments' share price struggles so far this year, dropping by around 5% since the start of the year.

​Redrow’s share price is seeing a similar performance to that of the FTSE 100 index, being slightly up since the beginning of January whereas the FTSE 100 remains slightly down.