The Housebuilders & Banks Recovery: How far can it run?

How things can change in two and a half months. Far from struggling after Brexit, the UK is doing more than just staying afloat. In some cases it looks to be thriving. Over half of UK 100 listed companies are trading above their pre-Brexit levels. A further 29% have posted fresh all-time highs over the same period. The Bank of England, having acted swiftly to keep Britain out of recession, may have done all it needs. Can this continue? Or is a reversal on the cards?

As the UK Index 100 trades around 6% higher than the close on 23^rd June, notable bounces in the share prices of UK Housebuilders and Banks have made a significant contribution to the spring in the UK Index ’s step. This report focuses on remarkable recoveries by both sectors and whether their post–Brexit rebounds have legs or not.

If you believe so, the next question to ask is ‘how far can it rally?’ There are still hurdles in the road for UK companies to overcome as the long-term impacts of Brexit remain unclear. Economic data, whilst perhaps unspectacular, remains favourable versus the doom-and-gloom forecasts for the fallout. However, it’s still early days and more data is likely required to be sure, with plenty of room for more uncertainty with the divorce from the EU still well over two years away.

Building Momentum or Cracks in the Foundations?

As the dust cleared in the days that followed the referendum, housebuilders’ share prices suffered some of the biggest losses on the UK 100 . The Brexit impact on UK house prices was touted to be one of the largest with a forecast 20% drop. Investors reacted pessimistically to short-term prospects for the sector expecting demand for property in the key London and South East area to evaporate overnight. Remarkably, however, many of the housebuilders are declaring ‘business as usual’, albeit with an uncertain outlook. Redrow even announced a reverse profit warning with people queuing up for viewings, so it is now expects profits ahead of schedule. However, McCarthy & Stone has gone against the grain with a negative update.

The table above details the share performance of the largest UK housebuilders since the Brexit vote, with the most notable recoveries being Persimmon and Barratt Developments. Bounces range from a respectable 10% to a staggering 290% headlining the resilience of this key part of UK economy since the referendum, although performances are still below pre-Brexit levels and that 5% to 30% deficit could prove too far to scale for some.

On the back of a +6% year on year increase in demand for new house builds in July, the impact of the June vote has been negligible so far for Barratt and other UK housebuilders. Persimmon’s home reservations are +17% since the referendum. Most recently, Galliford Try posted a better-than-expected +18% in full year profits. These figures, alongside promising consumer data, notably retail sales, may see the trend continue for housebuilders. However, the summer period is notably quiet for housing transactions.

For the moment, housing demand looks set to continue to outstrip supply which can only be good for house prices and the housebuilders. Will a weak pound eventually put the squeeze on housebuilders’ profit margins or will the attractiveness of a currency discount allow foreign demand to pick up the slack?