Bearing in mind that housebuilders spectacularly failed to notice that the housing market was heading towards a cliff edge two years ago, why are investors buying into this sudden talk of recovery and sending share prices skywards? The short answer is that nobody knows
“It’s certainly not earnings that are driving housebuilders’ share prices, or asset values,” says Leslie Kent, analyst at JM Finn. “Housebuilders are selling the recovery in a big way, but the number of houses being built is way below peak and the recovery is still some way off. The stock market is looking too far ahead.”
Yet on the back of the sharp rise in share prices, Barratt and Redrow last week tapped the market for a total of £870m to fund a land buying spree. The sweetener for investors is plain to see: Barratt’s £545m rights issue (it is raising a further £175m in a placing) announced, like Redrow’s, on 23 September, was priced 63% below its 22 September closing price; Redrow’s was 55% lower.
But the cash call is not a vote of confidence in the future. “Companies have to buy new land because existing landbanks have no profit in them,” says Robin Hardy, analyst at KBC Peel Hunt. “The only way to make profit, assuming there is no inflation, is to purge yourself of your unprofitable landbank and replace it with one bought under more normal conditions, where you can make a clear margin in the market you’re in.”
In short, there is no credit in the system and housebuilders are unable to increase debt and gearing, so passing the hat around is the only way they can keep some momentum in their business. Or, to put it another way, this dash for cash underlines the weakness of the recovery, not the faith in its future strength.
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