Newcastle-based developer Bellway (BWY) delivered an unsurprisingly downbeat assessment of the current new-build market alongside its results for the last year to the end of July.

After dropping 4% initially, the shares steadied to trade 1.4% lower at £21.32 as investors digested the outlook comments.

SHARP FALL IN NEW BUILDS AND MARGINS

For the 12 months to 31 July, Bellway completed 10,945 homes, 2.3% fewer than the previous year, while revenue of £3.4 billion was 3.7% lower.

However, in the coming 12 months the FTSE 250 firm is targeting just 7,500 completions, a drop of more than 30%, due to its reduced order book and the likelihood interest rates – and therefore mortgage rates – stay higher for longer.

In the nine weeks since the start of August, private reservations were 99 per week against 136 in the same period last year, but this figure was flattered by a bulk sale of 71 homes to a private rental sector investor which the firm said was on ‘compelling financial terms’.

The actual private reservation rate per outlet, excluding the bulk sale, was 0.38 per week against 0.58 a year ago, while the order book sits at just 4,636 homes compared with 7,257 at the same stage last year.

While it is targeting 7,500 new homes this year, the firm has very little visibility and has cautioned that ‘a wider than usual range of outcomes are possible, and the final volume outturn will depend on the trajectory of mortgage interest rates and the strength of demand in the autumn and spring selling seasons’.

Moreover, selling prices are falling with the best estimate for this year currently £295,000 against an average of over £310,000 last year due to a higher mix of social housing and the continued use of incentives to lure in homebuyers.

This combination of more than 30% fewer completions and falling prices means the underlying operating margin is likely to collapse from 16% last year to around 10% this year.

In the briefest of statements, chief executive Jason Honeyman said that ‘notwithstanding the near-term market challenges, Bellway remains very well-placed to capitalise on future growth opportunities and to continue creating long-term value for all our stakeholders’.

WHAT DO ANALYSTS THINK?

Discussing the outlook for the current year, Julie Palmer, partner at business advisory group Begbies Traynor (BEG:AIM), observed: ‘Demand in the new financial year clearly isn’t improving with reservation rates below where they were a year ago.’

‘In the long-term, Britain is still suffering from a severe housing shortfall as there simply have not been enough new builds completed in recent years. The 7,500 homes Bellway expects to complete in 2024 won’t do much to solve the problem in the short-term but the future for housebuilders like Bellway remains strong if a government decides to tackle the shortage head on’, added Palmer

AJ Bell investment director Russ Mould commented: ‘It’s a miserable time to be a housebuilder despite operating in a country with a chronic housing shortage. Bellway has seen a sharp decline in the number of new home reservations and that has led it to guide for lower volume output in its current financial year.’

‘Selling prices haven’t fallen off a cliff, which is reassuring for the company. However, it is at the mercy of the mortgage market and the ability for aspiring homeowners to be able to afford a loan at the current elevated interest rates’, concluded Mould.

LEARN MORE ABOUT BELLWAY

Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Ian Conway) and the editor of the article (Martin Gamble) own shares in AJ Bell.

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