UK homebuilders ready for whatever Brexit brings

[LONDON] UK homebuilders have a lot of breathing room to survive plunging share prices and the potential for a Brexit-induced housing slump, data compiled by Bloomberg show.

Gauges of credit healthheld at investment-grade levels for 11 of 13 listed U.K. homebuilders, even as their stocks slumped an average 27 per cent in the wake of the U.K.'s vote to leave the European Union. McCarthy & Stone Plc dropped into junk territory under Bloomberg's risk model, which is based on debt loads, interest expenses, cash flow, volatility and share prices. Trafalgar New Homes Plc was already in the high-yield zone.

With two-thirds of UK households owning their homes, the health of the housing market is closely associated with the country's economic prospects, making the industry "a key bellwether," said Niraj Shah, a London-based economist for Bloomberg Intelligence, in an interview.

The drop in gilt yields since the vote "is an indication that mortgage rates are not going to go up," Mr Shah said, and there are signs that "available credit is not going to dry up, which is the biggest risk to the economy and the housing industry." Builders including Taylor Wimpey Plc and Persimmon Plc have amassed cash reserves in recent years as the UK's spiraling home prices stoked sales and profits. That may help them weather any housing-market slowdown as economic uncertainty following the Brexit vote adds to drags caused by higher taxes on private landlords.

"Homebuilders have made progress since the financial crisis, and their balance sheets are better prepared for a downturn," said Henrietta Pacquement, a London-based portfolio manager at ECM Asset Management, which is part of Wells Fargo Asset Management. "You'd expect a lull in terms of activity in house building" because of the referendum, she said.

Nobody at Trafalgar New Homes was available for comment on credit risk when called. A McCarthy & Stone official declined to comment on credit risk and referred to a June 29 announcement.

"Notwithstanding any short-term market impact of last week's referendum result, the business remains in good shape to deliver on its medium-term strategy," Chief Executive Officer Clive Fenton said in the statement. The company focuses on retirement homes.

BLOOMBERG