Persimmon Plc’s pending exit from the FTSE 100 Index after a decade-long stay provides the latest sign of how the highest UK interest rates since the global financial crisis are crushing the country’s property-related stocks.
(Bloomberg) — Persimmon Plc’s pending exit from the FTSE 100 Index after a decade-long stay provides the latest sign of how the highest UK interest rates since the global financial crisis are crushing the country’s property-related stocks.
Index compiler FTSE Russell confirmed late Wednesday that the homebuilder is one of four stocks that will be relegated to the midcap FTSE 250 Index, where it will join other former members of the blue-chip gauge, including commercial property landlord British Land Co. and mall developer Hammerson Plc.
The change, brought about by tumbling share values, will further reduce the already-small presence of real estate investment trusts and home construction stocks in the FTSE 100. Their weighting in the gauge has fallen from almost 3% before the pandemic to about 1.7%, according to data compiled by Bloomberg.
For AJ Bell investment director Russ Mould, a flurry of Bank of England interest-rate increases are a key reason for the pressure being felt by both homebuilding stocks and commercial real estate firms.
“Higher borrowing costs potentially dampen mortgage demand and thus demand for new houses,” Mould said. “Commercial real estate stocks are also worrying about higher rates, not least because they have a fair amount of debt themselves.”
Just this year, Persimmon has gone from being the largest to the smallest of four homebuilders in the FTSE 100 Index. All of them now rank in the gauge’s bottom 20 by market capitalization, with their combined value dwindling to about £16 billion ($20 billion) from £34 billion before the pandemic.
That’s on the back of recent downbeat statements from the nation’s housebuilders, as the highest mortgage rates in well over a decade sap demand for homes.
Persimmon, Taylor Wimpey Plc and Barratt Developments Plc, all high-volume developers which collectively built more than 45,000 homes last year, will almost certainly complete fewer properties in 2023. It’s those companies that are more exposed to the current downturn, as property transactions drop across the UK.
“The current stress in the sector has been largely brought about by declining volumes,” said Oli Creasey, an equity research analyst at Quilter Cheviot. “Seeing first time buyers struggle to afford mortgage rates has slowed revenue down markedly at all three big names.”
According to David Kneale, head of UK equities at Mirabaud Asset Management, commercial real estate companies have been hurt by the shift to online shopping as well as hybrid working arrangements.
‘Painful Cycle’
Homebuilders have faced a “very painful cycle” that has exposed “business or management frailties,” Kneale said, while adding that he sees scope for a comeback, given the industry’s adaptability and strong balance sheets.
“The UK has a structural shortage of housing and relatively few businesses with the organizational capability to deliver at scale,” he said. “It may take a while, but the housebuilders’ time will come again.”
Persimmon has been ejected from the FTSE 100 Index on a prevoius occasion, in 2008, that time after a 2-1/2 year stay.
Other stocks leaving the FTSE 100 Index with Persimmon are Abrdn Plc, Hiscox Ltd. and Johnson Matthey Plc, while those entering are Dechra Pharmaceuticals Plc, Diploma Plc, Hikma Pharmaceuticals Plc and Marks & Spencer Group Plc.
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