Credit crunch drives construction shares to year lows

November proved to be the cruellest of months for housebuilders’ shareholders, with Barratt, Persimmon and Taylor Wimpey all crashing to year lows after bearish trading statements. And, so far this month isn’t looking any better.

The catalyst for the bloodbath is of course the fall-out from the global credit squeeze. The woes of the US sub-prime mortgage market have led to more than £29bn of writedowns globally as the world’s banks lick their wounds.

Official figures released this week reveal that the volume of market loans in the UK banking system plunged from £640bn in August to just £249bn by the end of September. Also this week the one-month sterling LIBOR (the rate at which banks lend to each other) hit a 10-year high. The frenzy surrounding this turmoil has also turned a construction sector share price slump into a crash.

Leslie Kent, a director at broker JM Finn, said: “It’s not Armageddon, but the sector will need time to adjust to tighter credit. There’s been a serious change in the market and how housebuilders fare in the crucial first quarter will determine if the current decline is a permanent factor. For contractors it’s slightly different – in some respects they have held up quite well.”

Since April, which the Square Mile took to be the top of the market, shares in housebuilders have plunged more than 50%, wiping something in the region of £10bn off their collective value.

On their way south, they have managed to drag their some of their construction cousins down with them, sending Kier, Carillion and Morgan Sindall into a tailspin.

It’s not really Armageddon but the sector will need time to adjust

Leslie Kent, broker JM Finn

Yet, by and large, shares in contractors, perennially undervalued by the City, have survived relatively unscathed.

Balfour Beatty is trading at about 480p, closer to its year-high of 508.5p than August’s year-low of 383.25p.

Kier, the contractor that has never understood why the City doesn’t love it but remains on the market, is exposed through its housebuilding division, which accounts for a fair chunk of profit. The spectacular collapse in its share price, which remains near its year-low, began at the same time as the housebuilders’.

But in the last three months, compared with the housebuilders, it has not fared too badly. On 9 September it was trading at £19 and this week at about £16.

Contrast that with Barratt, which was trading at £9.12 on 9 September. This week, three months later, the price was £4.80. (Barratt’s year-long high is £13.10.)

Kent said: “It’s not much consolation but the City is much more savvy when it looks at construction sector shares these days. It no longer tars them with the same brush and can see the difference between the contracting and housebuilding markets.”