Persimmon plc is about to leave the FTSE 100 Index, after a decade of staying. This is the latest indication that the UK’s interest rates are at their highest since the global financial crash.
Index compiler FTSE Russell confirmed Wednesday night that the homebuilder was one of four stocks to be relegated from the blue-chip index. It will now join former members such as commercial property landlord British Land Co., and mall developer Hammerson Plc.
This change will further reduce the presence of home construction and real estate investment trusts in the FTSE 100. Data shows that their weighting has dropped from almost 3% in the index before the pandemic, to around 1.7% now.
Russ Mould is the investment director at AJ Bell. He believes that a flurry of Bank of England rate increases has been a major factor in the pressure felt by homebuilding stocks as well as commercial real estate companies.
Mould stated that higher borrowing costs could dampen demand for mortgages and therefore new homes. Commercial real estate stocks also worry about rising rates, in part because they are already heavily indebted.
Persimmon went from being the largest of four homebuilders to the smallest in just one year. They all now fall into the bottom 20 of the FTSE 100 Index by market capitalization. Their combined value has fallen to around £16 billion ($20 million) from £34billion before the pandemic.
This is in line with recent statements of dismay from housebuilders across the country, as mortgage rates are at their highest level in over a decade.
Persimmon and Taylor Wimpey plc, both high-volume developers who collectively constructed more than 45,000 houses last year, are almost certain to complete less properties by 2023. These companies are most vulnerable to the current recession, with property transactions dropping across the UK.
The current stress in this sector is largely due to declining volumes, said Oli Ceasey an equity research analyst with Quilter Cheviot. The fact that first-time buyers are struggling to pay mortgage rates has caused revenue at all three major names to drop significantly.
David Kneale is the head of UK equity at Mirabaud Asset Management. He says that online shopping and hybrid working arrangements have hurt commercial real estate companies.
Kneale stated that homebuilders had experienced a “very painful” cycle that exposed “business or managerial frailties.” He added that the industry has been able to adapt and have strong balance sheets, which he believes will allow it to make a comeback.
He said that the UK faces a structural housing shortage and there are relatively few companies with the organizational capabilities to deliver on a large scale. “It will take some time, but housebuilders will be back in business.”
Persimmon was ejected in 2008 from the FTSE 100 Index after a two-and-a half year stay.
Persimmon is not the only company to leave the FTSE 100 Index. Hiscox Ltd., Abrdn Plc and Johnson Matthey Plc are also leaving.
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