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Best May Be Over for Buoyant U.K. Homebuilders on Brexit Effects

  • Analysts see second-half slowdown as stocks head for June drop
  • Construction cost concerns add to cooling property market

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U.K. homebuilder stocks may hit a ceiling after a steep climb in the first half as a frail economy and slowing price growth catch up with an industry that has defied expectations since the Brexit vote.

The FTSE 350 Household Goods and Home Construction Sector Index has climbed 16 percent this year and about 9 percent since the U.K. voted to leave the European Union a year ago. The pace is likely to slow in the second half and beyond amid concerns ranging from domestic politics to construction costs, analysts say.

“The best part of the year is almost certainly behind us,” Colin Sheridan, an analyst at Davy Research, said by phone. “The sector could do reasonably well in the next month on the back of positive news from companies, but beyond that, there are some risks starting to pile up.”

Homebuilder shares are heading for a pullback in June that would mark the index’s first monthly decline since November. Sentiment in the past 12 months has been helped by strong home completions and rising profit at firms including Redrow Plc, Taylor Wimpey Plc and Persimmon Plc, leading some to speculate that concerns of a major slowdown were overblown.

A year after the secession vote, pressure on the U.K. economy is increasing, with the fastest inflation rate in more than three years curbing consumer spending and house prices for the three months through May growing at the slowest annual pace in four years.

Any conclusion that homebuilders have “shrugged off Brexit” would be premature, Robin Hardy, an analyst at Shore Capital, said by phone.

“I struggle to see how the sector can continue to improve,” he said. “We’ve carried so much share price improvement without any visible means of support. Everything so far has been removed from what we would consider a normal trading environment in the housing market. That tends not to be sustainable.”

In addition to the uncertainty surrounding the terms of Brexit and U.K. domestic politics, Hardy pointed to concerns about labor supply in the construction industry. About 8 percent of the U.K.’s construction workforce is from the EU, according to a Shore research note, the share gets bigger in the Home Counties in southeast England and is as high as 50 percent in London.

In an environment where house prices soften while construction costs could rise, builders’ gross margins are facing a pullback from current levels in the long term, analysts said. Some of Britain’s biggest property firms warned last year that an exit from the EU would raise the cost to build new homes and hinder development projects.

Recent reports from builders including Bellway Plc and Berkeley Group Holdings Plc show that the firms are on track to meet or exceed their targets. Sheridan, who has written that the past financial year will probably represent “peak profits” for Berkeley, says the next few weeks should see positive updates from builders, but he’s more cautious beyond that time frame.

Shore Capital’s Hardy’s advises cashing in on homebuilder stocks. For investors who want to stay in the market, he prefers medium-sized builders to large-cap peers, due to advantages including more attractive valuations. Housebuilders are beating the broader FTSE 250 Index of mid-cap U.K. companies this year, a gauge that’s more domestically oriented than the exporter-heavy FTSE 100 equity benchmark.

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