Taylor Wimpey is beginning a phased reopening of show homes and sales centres in response to the new government guidance. The group recorded a stable sales rate over the lockdown, and activity has picked up over the last week.
The shares rose 1.7% Â in early trading.
In our view, many people are likely to delay moving house for at least the next few months. Furthermore, potential job losses and corporate bankruptcies could cause financial hardship to many. That could leave housebuilders facing both lower volumes and lower house prices if the disruption is sustained or we enter a prolonged recession.
Interestingly, Taylor Wimpey has so far managed to keep pricing stable during the lockdown, although sales have taken a hit. This is a positive development, and we hope pricing can be sustained while sales recover. However, it's also possible prices will have to fall to keep sales moving forward.
Housebuilders have masses of capital tied up in land, raw materials and homes at various stages of completion. If house prices fall far enough these can't be sold at a profit and their value will be written down. If volumes also decline the problem is compounded, and cash flow can quickly become a real issue.
That's why Taylor is taking drastic measures to keep cash within the business. The group has suspended all dividend payments and fully drawn down its available credit lines. Taylor looks like it probably has enough immediate liquidity on hand to ride out disruption, provided it's short lived. Management seem to be more confident, and are talking about using the cash they've saved to take advantage of new opportunities. We hope the optimism isn't misplaced, but if we get a smooth economic recovery this attitude should be a benefit.
Other fundamental factors driving the UK housing market in recent years remain in play. Brits are ideologically committed to home ownership and the country still faces a major housing shortage. Interest rates are still incredibly low by historical standards, so mortgages remain cheap. Clearly housebuilding has a long term future, but the short term could be tough and individual companies may struggle.
The market has recognised the risks to Taylor's business and the shares have fallen heavily since the outbreak began. The shares currently change hands for 1.5 times book value, although as we've said, book value could be written down if house prices fall far enough.
Taylor Wimpey has sold 408 homes, net of cancellations, during the lockdown. That equates to 0.3 private home sales per outlet per week.
Cancellations have averaged 27% over the period and have moderated in recent weeks. The order books stood at 11,033 homes with a value of £2.7bn on 10 May, compared with 10,489 homes worth £2.5bn at the same point last year. Cancellations accounted for just 2.5% of the private order book over the period.
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