UK housing sector ripe for deals as firms look to boost land bank
Reuters
Published Feb 21, 2024 08:47
By Aby Jose Koilparambil
(Reuters) - The UK housing sector could see more deals this year as homebuilders seeking to build up their land holdings in anticipation of a recovery look out for bargains in a beaten-down market.
British homebuilders have grappled with sinking demand through 2023 as high mortgage rates and a prolonged cost-of-living crisis hammered their stock prices.
Even with recent signs of stability fuelled by a slight improvement in home prices and easing mortgage rates, share prices have remained well below record levels scaled in 2020, making the sector ripe for deals.
UK's largest housebuilder, Barratt, set the tone earlier this month, snapping up midcap player Redrow (LON:RDW) to broaden its presence in south-central England and add Victorian-modelled 'heritage' homes to its offerings.
"The conditions are most conducive for more such deals amid a difficult land and planning system as consolidation is an efficient and quick way to access more land," said Investec analyst Aynsley Lammin.
Redrow founder and former boss Steve Morgan noted that the deal with Barratt would not have been necessary in a healthier housing market, adding that the tough planning system and an inability to ramp up land purchases were hindering organic growth for the company.
The UK housing index has lost more than one-fourth of its value in the three years to 2023-end, compared with a 20% gain in the blue-chip FTSE 100 index.
Russ Mould of AJ Bell said: "Builders are potentially cheap when they trade around one-time book value and below, and are probably expensive when they trade toward two times TNAV (tangible net asset value) and above."
Crest Nicholson (LON:CRST), Bellway (LON:BWY), and Taylor Wimpey (LON:TW) look cheap compared to Barratt's offer for Redrow, Mould noted.
The shortage of homes in the UK will also be a priority for both the ruling Conservative party and opposition Labour in an election year, and homebuilders will be on the hunt for attractive deals to acquire land and ramp up production.
Shane Carberry of Goodbody Stockbrokers said housebuilders that are trading in and around book value become appealing prospects, for either another PLC or private equity players.
The last big round of deals in the UK housing sector happened in the 2005-07 period when Barratt bought David Wilson, Persimmon (LON:PSN) acquired Westbury and Taylor Woodrow merged with George Wimpey.
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"It turned out that those deals came pretty much at the top of the cycle, and any buyers now will feel they are getting in a lot nearer the bottom, when valuations may be more tempting," said AJ Bell's Mould.
In 2019, Bovis Homes (LON:VTYV) bought Linden Homes, and the combined entity later operated as Vistry, which lapped up Countryside Partnerships three years later.
Barratt CEO David Thomas has said that the combined entity - Barratt Redrow - would get a look at larger land sites for acquisitions than what both parties could have managed individually.
Written By: Reuters
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