So much for the brighter outlook

The post-election housing recovery was gathering pace, with newly enthused buyers shrugging off storms Dennis, Ciara and Jorge. Then a far more ominous storm in the shape of coronavirus raged around the world.

Last week’s RICS housing survey showed further evidence of the country’s mass sigh of relief after the seemingly interminable Brexit schism all but evaporated after the election. Buyer enquiries, sales volumes and prices were up for the third consecutive month. This week’s Rightmove survey also reported higher asking prices and faster selling periods.

But clouds were already lurking behind the silver lining. In the agents’ comments at the back of the RICS report, Alex McNeil of Bramleys in Huddersfield cautioned: “Nonstop rain in February did not dampen the market and there could be a window for increased activity until Brexit [negotiations]. This window may, however, be closed by the impact of coronavirus.”

The first suggestion of an actual slowdown came from national estate agent LSL Property Services, which reported in its 10 March results: “We have seen some slight softening of our lead sales indicators.” A few days later, LSL pulled out of talks to buy rival Countrywide, with the latter’s already weak shares halving again during the morning of the announcement.

Housebuilders have been among the worst casualties of the global stock market sell-off, with the biggest ones falling on Monday 16 March to about half their all-time peaks scaled less than a month earlier. That was despite the largesse and economic support of Rishi Sunak’s Budget, the Bank of England cutting rates and the government, in my humble opinion, doing a pretty damn good job in a frantically complex situation.

We will pull together

I had doubted anything but the most plague-like outbreak would diminish the refreshed appetite among many consumers to buy homes, at least in the medium to long term. Notwithstanding the images of morons cramming their shopping trolleys with baked beans and Andrex, we will pull together as a society and emerge with a strengthened and possibly rebalanced economy. Ditto for housing.

But for at least the next few months, there is unlikely to be much appetite to trail through a succession of strangers’ homes – especially given the highly uncertain jobs outlook.

By the time this column appears, there will no doubt be more ‘Covid calls’ from other residential groups. How different developers and agents will fare in an enforced and possibly protracted ‘buyer strike’ will largely depend on their overhead structures and balance sheets. Ungeared local estate agents should be able to cut costs to the bare bones, as they invariably do in downturns; large chains with significant borrowings, less so.

Housebuilders are in a far stronger position than in the aftermath of the global financial crisis. Most have net cash, at least at their year-ends. But further cash preservation will be a reasonable reaction – hence, probably a few extra price reductions on the last units on individual sites and less of an appetite to buy new ones. Land prices will probably fall.

Could this prospect have at least partly informed Berkeley Group’s surprise decision on 12 March to postpone its £455m increase in shareholder returns (reverting instead to the not insignificant £265m previous plan for this year) until there is greater clarity on the operational impact of coronavirus? Last time the group curtailed a similar shareholder returns programme, it used the saved money to embark on an ultimately highly lucrative land-buying programme, when rivals were on their knees.

The hints seemed to be clear in the statement: “Berkeley’s business model is set up for the cyclicality of the housing market; to withstand downside scenarios and be well placed to take opportunities as they arise. Berkeley has net cash of in excess of £1bn at the date of this statement with a further £750m of bank facilities available.”

So far there have been (surprisingly) few signs of financial distress among the wave of inexperienced, leveraged and largely foreign developers that cascaded into Berkeley’s London heartland in the last decade. For Berkeley (other financially fit and savvy developers are available), coronavirus and a global banking system facing possible meltdown might change that.

Alastair Stewart is an equities analyst and consultant