Plenty of British businesses are feeling the pain of the downturn, but none more so than the property sector. May’s report on the housing market from the Royal Institution of Chartered Surveyors revealed that completed sales per surveyor now stand at the lowest since records began in 1978, while the stock of unsold property on surveyors’ books is 45% higher than a year ago. This makes market conditions “the loosest since end-1995”, says Capital Economics, which expects to see a 25% drop in new completions between last year and 2009.
What now for housebuilders?
That’s very bad news for builders. Falling prices are bad enough, but the real problem is the complete collapse in sales. Barratt (LON:BDEV), which has seen its market cap plunge to just over £250m as shares have hit a 20-year low, was singled out for scrutiny by the City. Last year’s £2.2bn takeover of former rival Wilson Bowden has left the company vulnerable, and it now “needs £1bn to survive” said The Telegraph. The group’s “plight may be so severe it will need to resort to a debt-for-equity swap” to shore up its balance sheet. “Investors are spooked that falling house prices, and the knock-on effect on land values, could see the group break banking covenants on its £1.7bn debt”, said Sarah Arnott in the Independent.
And with the banking sector already forging ahead with rights issues, it’s not clear how much more money investors will be willing to throw after companies crippled by the property slump. As Dresdner Kleinwort analyst Alastair Stewart put it in a research note on Barratt: “We can’t gauge the chances of a rescue package being supported. Don’t buy (at any price).” With shares in Taylor Wimpey, Persmmon and Redrow also down 50% or more in 2008 alone, there could be further bad news to come.