What a weaker pound means for housebuilders

October 19, 2016 / Isla MacFarlane
What a weaker pound means for housebuilders

Love it or hate it, Brexit took another bite out of the UK economy this week, claiming an unlikely victim. Marmite was one of several iconic British brands to vanish from supermarket shelves during a price war with supplier Unilever, who wanted to raise prices 10% in response to the falling pound.

The short-lived dispute was resolved and Britain went back to enjoying breakfast, but the threat of a Marmite shortage was a harbinger of things to come; prices will go up and this may leave the cupboard bare.

Since Theresa May bruised hopes that the UK might remain in the single market, the pound has been dragged down to a 31-year low. The consequences of a looming Brexit are palpable once more.

So what does this mean for the housebuilding industry? “Housing has perhaps felt the brunt of the Brexit vote and now UK housebuilders are having to contend with rising costs due to a weaker pound,” said Evdokia Pitsillidou, Director of Risk Management at easyMarkets. “The industry relies on imported materials and with a 9% drop against the euro and 15% against the US dollar, the scene isn’t getting any prettier.”

However, just as a shortage of Marmite did little to quell the public’s appetite for the yeasty spread, demand for new housing is unlikely to shift. “Housing has been in great demand, and supply in areas like London and the south-east have been extremely low so we’re unlikely to see demand drop, especially from overseas investors taking advantage of a favourable exchange rate,” said Pitsillidou.

There has been much talk of increased demand from overseas, and a further fall in sterling will surely tempt more bargain hunters. “October’s flash crash and the failure of the pound to recover against the dollar will only create further opportunities for overseas investors looking to acquire UK property, especially new build stock in the capital where prices are already suppressed,” said Jonathan Stephens, managing director of property consultancy Surrenden Invest.

“Overseas buyers who may have been sitting on the fence now have the opportunity to exploit the current sterling weakness, many feel to be exacerbated by Theresa’s May’s ‘Hard Brexit’ stance, further,” Stephens added.

With overseas investors weighing more demand on an already under-supplied market, housebuilders will be under pressure to build in spite of rising costs. “Despite concerns over sterling’s value dropping, it will be business as usual for the housebuilding industry – it has to be – new homes are a necessity as we still have a housing crisis in London,” said Henry Smith, CEO of Aitch Group. “The pound has been weak since June 23, yet the housebuilding industry has remained strong and productive, despite the ongoing uncertainty.

“The resilience of property developers, coupled with government’s announcement of two major housing initiatives earlier this month, means the outlook remains positive, despite the decline in currency value.”

Nonetheless, housebuilders must be prepared for rising costs. The value of imported construction materials represents 10% of construction output, according to ONS estimates. Sterling has lost 15% against the Euro and 18% against the Dollar since the referendum. If this feeds directly through to the price of materials prices will rise around 3%, and overall construction costs by over 1%, according to an analysis by RICS.

“Naturally, the fall in the pound demands that the property industry takes extra care with where they allocate resources and we may see this potentially leading to more UK produced products being used,” said Smith. “However, I’m of the opinion that it is crucially important for the industry to keep the development pipeline rolling by making bold commitments – sitting on our hands could have disastrous effects.”

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