Property & Construction Daily

The Property & Construction Daily provides a sector-specific comment from leading analyst Alastair Stewart. His daily perspective provides a round-up of market statements, news, economics and views from the property and construction sectors.

<< Back to Property & Construction Daily archive

August 31, 2023

GFTU | Economy – ‘Affordable homes building to fall by more than a fifth’ as costs soar

Company news

Grafton Group (GFTU, 855p, £1,807m mkt cap)

UK, Irish, Dutch builders’ merchant and products group. HY (Jun) results. Rev +3.2%, £1,189m; adj PBT -27%, £104m; stat PBT -29%, £94m; adj EPS -23%, 38.1p; interim div +8.1%, 10.0p; net cash, £438m (HY 22, £521m); net cash post-IFRS16, £3.7m (£74m). Trading: UK businesses contributed 40.4% (42.0%) of group revenue, Ireland 38.2% (37.5%), Netherlands 15.5% (14.6%) and Finland 5.9% (5.9). UK Distribution, rev -2.2%, £419m; adj op margin, 5.8% (15.2%). “Selco experienced challenging trading conditions in the residential RMI market as households reduced investment on home improvements and discretionary spending on repairs and maintenance, although the pace of the decline in volumes moderated towards the end of the half year. We responded to market conditions and invested in price on core products, balancing volume and margin to optimise profitability. We also implemented measures to realign volumes and operating costs that will create material savings in the second half of this year and next year”. Outlook: “The decline in first half adjusted operating profit (before property profit) was as anticipated. Full year adjusted operating profit is expected to be in line with analysts’ expectations [ave, £203m; range, £195m – 209m]. In the UK, activity in the housing RMI market is expected to be challenging over the remainder of the year. In view of the reduction in order books and reservation rates together with interest rates likely to remain higher for longer, we expect continuing caution by house builders about starting new developments in response to lower demand”.

Economic data

Affordable housing. Housing Associations anticipate a 22% reduction in the number of new affordable homes built over the short term due to increased build and finance costs, according to a major research report by Octopus Real Estate. The survey by the specialist lender and investor found that increased build and finance costs have led to a third of Housing Associations reporting a deficit of 11-25% on individual development schemes. However, more money will be diverted towards managing, repairing and maintaining existing homes; repairs and maintenance expenditure across the sector has increased by over £1.5bn in the past four years. 47% of housing association respondents said they were not confident they will be able to maintain their development at the same levels as last year. Constraints include: inflation, construction costs,
decarbonisation work, regulatory and policy-related pressures, and cost of debt. More recently, the social housing sector has faced a 7% rent cap, which is estimated to equate to a £3.2bn loss in rental income for registered providers. The G15 – which represents London’s largest Housing Associations – confirmed that its members are reducing development programmes by as much as a third. Some registered providers Octopus spoke with have cut back development by more than 40% because of financial conditions. Meanwhile, spending on repairs and maintenance has jumped from £5bn in 2018 to £6.5bn in 2022 and spending on existing stock is set to further increase as a result of the Government’s review into the Decent Homes Standard, alongside increased scrutiny on disrepair in the social housing sector.

Prices are as at the previous day’s close. Where quoted, net debt is pre-IFRS16 (excluding leases) unless otherwise stated.

Download Insight as PDF

This communication is provided for information purposes only, and is not a solicitation or inducement to buy, sell, subscribe, or underwrite securities or units. Investors should seek advice from an Independent Financial Adviser or regulated stockbroker before making any investment decisions. Progressive Equity Research Ltd (“PERL”) does not make investment recommendations.

Opinions contained in this communication represent those of PERL and/or our affiliates at the time of publication and PERL does not undertake to provide updates to any opinions or views expressed. PERL does not hold any positions in the securities mentioned in this communication, however, PERL’s directors, officers, employees, contractors and affiliates may hold a position,  and/or may perform services or solicit business from, any of the companies or related securities mentioned.

Any prices quoted in our research are as at the previous day’s close.