Housebuilder valuations are showing early signs of recovery as costs stabilise and house prices inch up – but growth expectations and cash conversion remain decisive, according to new analysis from FRP Advisory.
The study, Valuation Insight: UK Housebuilding and Construction, tracks how development margins collapsed between 2021 and 2023 as construction costs rose sharply ahead of house prices, creating a significant squeeze on profitability. Since mid-2023, the analysis shows a gradual recovery as cost inflation eased, though forecasting remains uncertain.
Key findings include:
- Margin cycles – Margins were stable from 2020 to mid-2021, fell sharply through 2021-23, and are now recovering slowly as prices rise against flatter build cost inflation.
- Growth and multiples – Listed housebuilders’ EV/EBITDA multiples show a 71% correlation with forecast two-year earnings growth across the cycle. Flat businesses trade at 5-7x EBITDA, while high-growth companies can exceed 10x.
- Cash conversion – Debt costs surged in 2022-23 just as margins compressed, making liquidity as important as profitability in determining value.
- Market dynamics – Smaller operators remain more vulnerable, but steady M&A activity highlights ongoing investor appetite for efficient businesses with strong land strategies.
Jim Davies, Partner in FRP’s Valuation Services team, said: “Valuations in this sector are now finely balanced. While margins are beginning to recover, credibility of growth forecasts and the ability to turn profit into cash are the real differentiators. We’re seeing these factors tested in live disputes, challenged in deal negotiations, and scrutinised closely by lenders. For boards, the priority is discipline, in financing, overheads and site selection, to defend value.”
The report also highlights the role of land bank activity, promotion costs and planning obligations, with many sites purchased at elevated prices before land values softened in late 2022. These factors, combined with ongoing pressures on mortgage affordability and housing association funding, underline the complex drivers of valuation in the sector.
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