A new Labour government may have given the UK’s ‘big six’ housebuilders something of a boost, but the question many are now asking is: when will completion volumes rise?

‘Big six’ outlook: sector leader Barratt’s annual figures showed a huge 57% fall in profit for the year to the end of June, while its home completions were almost a fifth down on the 2023 figure

With an acute shortage of homes, especially affordable and social housing, there appears little prospect of the main listed developers hitting Labour’s five-year target of 1.5 million new homes during its first term in power.

A glance at the latest figures and trading statements from the big six confirms as much. As it focuses on completing its £2.5bn merger with Redrow, sector leader Barratt is not making positive noises on completions.

Barratt’s annual figures – published on Wednesday – showed a huge 57% fall in profit to £385m for the year to the end of June. While the level of the group’s home completions was at the upper end of the guidance, it was almost a fifth down on the 2023 figure. Barratt also reiterated reduced housebuilding expectations of 13,000 to 13,500 homes in the year ahead.

Recent results have demonstrated a theme of better volume out-turns
Colin Sheridan, Davy

Aarin Chiekrie, an analyst at Hargreaves Lansdown, says Barratt has “struggled to build momentum” – an issue throughout the sector.

The message has been the same across the board, and particularly downbeat at Crest Nicholson, which had a welcome £720m bid from rival Bellway withdrawn in August following “due diligence”.

In its latest update, Crest Nicholson told investors it expected annual profit to be between £22m and £29m for the six months to 30 April, well down on City expectations of around £38m. The decline is based on a cut in expected annual housing completions to a maximum of 1,900, from 2,000 previously.

A rare positive announcement on completions came in Taylor Wimpey’s interim figures in July. Despite reporting a sharp fall in profit for the first half of its financial year, the FTSE 100 firm raised its outlook for house sales this year to between 9,500 and 10,000 homes, at the upper end of its guidance. But this would still fall below the 10,848 it completed in 2023.

Recovery ahead

For Investec analyst Aynsley Lammin, the big quoted housebuilders’ latest figures suggest we are at least at the bottom of the market, with completions by most volume housebuilders expected to rise before too long.

“We’re confident that this year will be seen as the trough, and then we’ll be in the early stages of recovery from next year,” he says.

“The industry is in good shape in terms of balance sheet and operational capacity. It’s managed itself well through the downturn and you’ve got an improving backdrop, with interest rates being cut, which should help the demand side, and also the government wanting to improve planning and ease the supply side.”

Market update: Bellway’s “recent outperformance of the sector” has seen “valuations recover materially”

Davy analyst Colin Sheridan agrees that completion volumes are starting to look more impressive. “Recent results have demonstrated a theme of better volume out-turns,” he says, adding that he expects a full-year 2% uplift from Bellway and Taylor Wimpey, and 1% at Persimmon.

Among the big players, Sheridan has a preference for Bellway, despite its reluctance to pursue the Crest Nicholson deal. He says its “recent outperformance of the sector” has seen “valuations recover materially”.

He adds: “With [lack of] affordability likely to continue as a dampening factor to a recovery, we are cautious on the sector at this point. We have a preference for Bellway, with 12% upside to its price target, followed by Taylor Wimpey, with a 5% upside.”

Lammin sees positives across the board. “You’ve had Barratt’s merger with Redrow, so that puts them in a good position with a strong balance sheet and land bank. So, they should be well positioned for growth going forward. The others are broadly in decent places; big names like Bellway, Persimmon or Taylor Wimpey have all got decent land banks. They can grow from a position of strength.

“Crest Nicholson does seem to be struggling in terms of sales rates. If Bellway had acquired Crest Nicholson, that would have catapulted them into the volume housebuilder group.”

Of course, interest rate cuts from the Bank of England can quickly boost optimism in the sector. The first 25-basis-point cut came in August, and almost all observers are banking on more to come. Indeed, high street banks and other mortgage lenders are already factoring them in. Interest rates on two-year, fixed, 95% loan-to-value (LTV) mortgages have fallen around 100 basis points from a peak of just under 7% last August. For five-year, fixed, 75% LTV mortgages, rates have fallen by around 100 basis points to a level of around 4.5%.

The private listed players can only build so much
Aynsley Lammin, Investec

“However, those rates remain materially elevated compared with the lows seen in the 2021-22 period,” says Sheridan. “In general, 75% LTV mortgages are 300 to 400 basis points above those levels, while 95% LTV mortgages are also around 300 basis points higher.”

While Labour’s 1.5 million new-build target in its first five years in power equates to the decades-long 300,000-homes annual target, it is seeking to ramp up development from well under this figure. But is this a realistic prospect, given that every government in the past few decades has failed to hit such a target?

Government support

Lammin believes that to hit its targets, the government will have to offer financial support to housebuilders. He says the government can achieve easy wins such as reverting to the five-year planning pipeline for local authorities and presumption in favour of sustainable development. However, he suggests that structural reform of planning is needed if the government wants to get to 300,000-plus homes a year being built.

Lammin adds the government is not focused on introducing new kinds of products, such as Help to Buy 2, or significant support on the demand side, so is strongly reliant on interest rates falling and the economy improving.

He says: “I think housebuilders would like to build more if the demand is there, because obviously that’s the best way for them to generate profits and cash, so they won’t sit on a land bank unnecessarily.”

However, volume housebuilders do not appear so keen on developing the most in-demand homes, instead focusing on the cash-driving ‘executive homes’ that are out of reach for those requiring affordable or social housing.

“You need capital to be injected into the industry to build these kinds of houses,” says Lammin. “Private listed players can only build so much, as their balance sheets only have the capacity to buy so much land. So, I think you probably need funding across the industry.”

In other words, don’t expect the big six to solve the housing crisis on their own – and the quicker Labour comes to that conclusion, the faster it may push some funding in the right direction.