Redrow says real estate market is ‘softening’ as profits rise

Redrow said demand in the real estate market was “moderating” back to normal levels after two good years as the homebuilder reported a 31% increase in annual profit.

As demand for home purchases continues to outstrip supply, rising mortgage rates, a slowing economy, a cost of living crisis and soaring construction cost inflation are creating headwinds opposites for home builders.

But Redrow, which has started to focus on high-yield regional businesses, said underlying pre-tax profit was £410m for the year to July 3, compared to £314m. pounds sterling a year earlier.

‘Modelling’: Homebuilder Redrow said demand in the property market was ‘moderating’ at historic levels

Redrow Stocks rose this morning and was up 1.01% or 4.80p to 481.00p in the early morning but over the past year the share price has fallen over 30%.

Other homebuilders, including Barratt Developments and Persimmon, have seen their share prices fall more than 35% in the past year amid fears of a housing market cooling in recent months. the year.

Redrow’s revenue rose 10% to a record £2.14billion last year, its latest results released today revealed.

The company’s overall profits were slashed by a one-off £164m charge to meet government demands for developers to fund the replacement of unsafe cladding in some buildings.

However, the group’s ongoing exit from the London property market appears to be bearing fruit.

Redrow non-executive chairman Richard Akers said: ‘The group has continued its withdrawal from the London market and this is expected to be complete by the end of calendar year 2022, with the exception of the ongoing Colindale development. .

“Excellent progress was made during the year in executing our regional growth strategy.

“Capital released from London over the past two years has been reinvested in land to help develop regional businesses.”

The group’s final dividend rose 19% to 22p, reaching a total dividend of 32p per share for the year, from 24.5pa a year ago.

Akers said: “Given rising inflation and rising interest rates, it is no surprise that the buoyant real estate market has moderated recently and demand has returned to historically average levels. “.

“It is on this basis that we have prepared our medium-term plan and we are confident that our timely investment in the land, combined with strong demand for our Heritage homes, will support our continued growth.

“In addition, our opening order book of over £1.4 billion puts us in an excellent starting position for FY2023. As a result, the business is well placed to deliver another round of solid results.

Charlie Huggins, head of equities at Wealth Club, said: “House prices have proved remarkably robust since the pandemic hit, supported by pent-up savings and cheap mortgages.” Redrow, like other homebuilders, has sprung money in this environment and earns huge margins to boot.

“Redrow’s premium housing resonates strongly in today’s environment, with the ‘space race’ supporting demand for larger family homes. But make no mistake, the main reason for Redrow’s success is high real estate prices and the general strength of the real estate market.

“It’s something he has no control over, and the big bad wolf of the recession could be about to blow the good times.”

“Rising house prices in recent years mean home buyers have to borrow more to move up the housing ladder. Combine that with rising interest rates, which ultimately means more expensive mortgages. , and the affordability of property could drop significantly.If interest rates continue to rise, it’s hard to see how the housing market would be immune.

He added: “It’s the kind of environment where you find out which homebuilders have built their success on a foundation of bricks and which are about to have their sticks and straw stolen.”

Concerns about the outlook for homebuilders come despite most of them having stock prices trading at undemanding valuations and much stronger balance sheets than when they were hammered by the financial crisis.

Adam Vettese, analyst at eToro, said: “The removal of liner repair fees and earnings growth have been exceptional over the past 12 months, while completions, revenue and its dividend have all shown signs of growth. decent.

“With such strong growth, it’s hard to understand why its share price is down more than 30% year-to-date. But Redrow is far from alone in this regard. Quite simply, the The reason homebuilders have underperformed the wider UK market this year is that there is a growing sense that the housing market is starting to cool.

“We have seen price growth slow slightly, which has led some observers to conclude that demand is peaking in the face of soaring inflation and rising interest rates. While that may be the case, if there’s one thing we’ve learned over the past decade, it’s to never write off the UK housing market.

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Penny D. Jackson