GO
Loading...

UK Builders Defy Gloom, but for How Long?

Echo | Cultura | Getty Images

The U.K.'s biggest homebuilders have reported sharp increases in profits and signaled a positive year ahead though analysts question whether the good times will last against a backdrop of economic woes.

British homebuilder Persimmon posted a 52 percent increase in full-year profits, beating analysts' expectations. It said forward sales had reached 1 billion pounds ($1.5 billion), attributing its strong performance to the U.K.'s government lending scheme aimed at improving access to mortgages. The company's shares were down 0.7 percent by 12 p.m. London time, after rising initially. The company said it was on track to make its first dividend payment of 75 pence per share in June 2013.

A similarly positive outlook was reported by Bovis Homes on Monday, which also reported a sharp increase in pre-tax profits of 54.1 million, a 69 percent rise on 2011; shares declined 0.8 percent after rising initially.

"Persimmon has had a fantastic run, and the tick up we've seen today is definitely warranted," Joe Rundle, head of trading at ETX Capital, told CNBC. "They've got their house in order and they're going to be returning a lot of capital to shareholders and there are good figures from Bovis…It's had a good run as well," he told CNBC Europe's "Squawk Box."

The British government has attempted to protect the country's construction industry from the downturn by introducing the "Funding for Lending" scheme to help lenders access cheap finance and maintain appetite within the valuable British property market.

However, mortgage approvals in Britain in January fell 14 percent year-on-year, seasonally adjusted data from the British Bankers' Association showed on Monday. Gross mortgage lending was 7.7 billion pounds in January, down from 8.4 billion in December.

"January's severe weather impacted adversely on what was already a subdued picture of borrowing demand from households and businesses. While general economic growth stalls, low consumer and business confidence generates a natural tendency to restrain borrowing appetite, repay borrowing where possible and to build up cash and savings as a buffer," BBA Director of Statistics, David Dooks remarked on the latest figures.

Rising national debt and sluggish to negative growth have contributed to a gloomy outlook for the U.K. economy - a picture likely to worsen after Moody's downgraded the U.K.'s credit rating on Friday, causing the pound to slip to a 16-month low versus the dollar.

(Read More: Is the UK the New 'Problem Child' of Europe?)

David Ritchie, CEO at Bovis Homes, denied that a weakening pound, higher living costs (the U.K.'s retail price index, which includes housing costs, stands at 3.3 percent in January from 3.1 percent in December) and lower wages would impact negatively on the company, but said the environment was "challenging."

"I think the business is well set to continue to work well in 2013 in what will be a stable but challenging market," he said. "We're not expecting mortgage market improvements."

"In terms of our customer base, they clearly have to generally borrow money from banks and the mortgage market has been constrained for over five years now and so we're dealing with a difficult market already," he said.

(Read More: Inflation is Coming, Says Bank of England)

'Rust Not Bust'

Persimmon, the U.K.'s second largest homebuilder, said it was able to sell more homes at higher prices in 2012 with the average selling price of Persimmon's properties increasing about 6 percent to 175,640 pounds. But according to ETX Capital's Rundle the housing market had not yet stabilized.

"I think the housing market is fairly stagnant and both [companies] point to the fact that credit is difficult to get to [however] they do say that the government's scheme to encourage mortgages are beginning to work," he said, adding that finance minister George Osborne should use this scheme as a "blueprint" to stimulate the economy using government backed schemes.

Peter Toogood, investment services director at Old Broad Street Research, told CNBC that, once you strip out inflation, the price decline in the once-booming British property market amounted to 24 percent since 2007.

"It's a rust, not a bust- and it's been a rust for a long time which feels less painful but it's still a decline," he said. "In places outside the South East of England, the decline has even touched 30 percent in some instances. This is in real terms. Inflation is at 5 percent a year, so nominal prices are not going up."

London's property market has seemingly defied the downturn, attracting widespread foreign investment making it one of the hottest real estate markets in the world. But Toogood warned against seeing the London market as a positive signal for the rest of the country.

(Read More: London Property No Longer Looks So Safe)

"London is a global property market, it has nothing to do with the U.K.," he said. "People shouldn't proxy London for anything, quite frankly….There was a flood of buying [in the capital] over the last two or three years… but there will be a price at which people finally tap out. I think we're approaching it about now," he said.

Symbol
Price
 
Change
%Change
PSN
---
BVS
---
GBP/USD
---

Featured

Contact Real Estate

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More
  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.