What prospects for UK housebuilding in 2018?
9 January 2018
Expectations for UK housebuilders going into the 2017 Budget were high but how are they looking in 2018? Mark Swain, co-manager of the Smith & Williamson Enterprise fund, examines how the Budget affected the market and asks how vulnerable are housebuilders may be this year.
The UK housebuilding sector has been one of the standout performers among UK equity markets over the last year, with some of the sector’s most well-known companies seeing shares climb more than 50% over 2017 to date*.
Expectations for the sector going in to the 2017 Budget were high, with some analysts hoping that Chancellor Philip Hammond would unveil a range of measures to support the housing market and house building in general, as well as helping first-time buyers to get on the property ladder.
In the event, the Budget was something of a damp squib from a housing perspective, with the only positive measure for the country as a whole (excluding Scotland) being the abolition of stamp duty up to £300k for first-time buyers. This was a widely anticipated move and unlikely to help other buyers who are struggling to raise large deposits.
Perhaps more worryingly, there were no details on the extension of the Help to Buy scheme and Hammond also made it clear that there would be an investigation into ‘land banking’, i.e. house builders holding on to land rather than progressing with new developments where permission to build has been given. The government also announced a range of measures to help support SMEs (small and medium-sized enterprises), which clearly might mean more competition for the larger, quoted house builders in the future.
Schemes such as Help to Buy have created a very favourable tailwind for the sector, which has returned c.250% over the last five years*, but sentiment could now turn.
Overall, it was a disappointing Budget for the large house builders. They have lobbied hard to build on the Green Belt but clearly such an outcome could be very unwelcome to many Tory homeowners in the shires.
House price inflation is likely to slow further and build costs are rising.
Perhaps the biggest challenge for the housebuilders though is the shortage of skilled labourers to build new homes; this problem is likely to be exacerbated by Brexit.
Valuation wise, some house builders now look very expensive; the likes of Persimmon are trading on a price to book1 of 2.8 times, above the previous peak levels seen in early 1990s and 2006*.
We made good money from long positions in the housebuilders in the run-up to the summer of 2017 but we now only have a long position in Bellway. In our short book, we have a number of positions in housebuilders and related areas. For us, the upgrade cycle is over and this leaves house builders vulnerable given their extended valuations.
The canary in the coal mine is perhaps the company managements, who have been selling their shares in recent months.
*Source: Thomson Reuters Data stream as at November 2017.
1The price/book (P/B) ratio, sometimes called the market-to-book ratio, links the share price of a company with the book or accounting value of shareholders’ equity per share. It reflects how many times book value investors are prepared to pay for a share.
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