Can UK housebuilders weather the storm?

After Crest Nicholson wrote down the value of land last week, should the rest of the sector be worried?

Investors backing a share price recovery for housebuilders received a jolt last week when Crest Nicholson (LSE:CRST) booked the first land write-down of the Covid-19 crisis.

Its shares tumbled 18% as the South East-focused builder disclosed exceptional items worth £51.2 million, including from impairments stemming from the economic uncertainty. More than half of the write-down was based around management assumptions for sales price reductions of 7.5% in residential and 32% for commercial.

In a more detailed look at the Crest update, UBS analyst Gregor Kuglitsch today considered whether this first material land write-down of the cycle was cause for investor worry.

His analysis has found that the stocks most protected from impairments should be Persimmon (LSE:PSN) and Berkeley Group (LSE:BKG), given the higher embedded gross margins in their landbanks at 34% and 27% respectively. Conversely, he noted that margins have been lower over recent years at Vistry and retirement housebuilder McCarthy & Stone (LSE:MCS).

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Kuglitsch pointed out that Crest Nicholson's margins have been weak for some time, making it more susceptible to land write-downs. He also highlights that Crest's assumptions are subjective and that other housebuilders may take a different view on the outlook.

He added:

“We can't rule out land impairments categorically given the site specific and relatively subjective nature of this accounting exercise. However, we think others in the sector are better supported by higher embedded gross margins in the overall land bank.”

Housebuilders have recovered from their share price lows seen in early April, with Taylor Wimpey (LSE:TW.) at one point this month trading 64% higher at 166p before a retreat to 141p in recent days. It had been at 236p prior to the market slump in February.

Many analysts have retained ‘buy’ recommendations on the blue-chip builders, with their confidence helped by the re-opening of building sites and signs of resilience for house prices.

The Help to Buy scheme is due to run until 2023 and there's likely to be ongoing government support for the sector, including through PM Boris Johnson's post-coronavirus recovery plan. 

It's also possible that other housebuilders may be better insulated against any downturn than Crest Nicholson, whose operations are focused on London and the South-East. As Redrow highlighted today when it disclosed its plan to scale back its London operation, the pandemic experience has caused home buyers to show more interest in living closer to green spaces.

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UBS anticipates that Redrow's decision to curtail work in London will result in write-downs to the tune of between £20 million and £30 million, but at 1%-2% of book value it says this is not a provision of the scale of 6% recorded by Crest Nicholson.

It notes that Redrow's sales rates in the five weeks since its offices re-opened were only running 5% lower than a year earlier, while a record order book of £1.42 billion should position the business for recovery in the 2021 financial year.

UBS has a price target of 690p on Redrow, which compares with today's 440p after a fall of 5%.