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Investors grab Brexit bargains among UK housebuilders

Daring investors are dipping their toes back into UK housebuilders, attracted by high dividend yields and low valuations even though they are seen as among the most vulnerable sectors in the event of a messy Brexit.

As Britain’s exit from the EU remains shrouded in fog, housebuilders have been top targets for short sellers betting on a fall in the shares, but recent data shows short positions have fallen and some investors are buying back in.

To those investors, Brexit fears and the perceived risk to housebuilders also give the potential for strong rallies. Indeed, British housebuilder stocks have risen 11 percent since their December low and Taylor Wimpey has shot up 30 percent since then.

“I like it when there’s a short. You can have good returns when there are disagreements,” said Fabrice Theveneau, head of global equities at Lyxor Asset Management in Paris, who has recently bought shares in some UK housebuilders.

“The guys who’ve been shorting the housebuilders made a lot of money on them… they could very quickly turn their positions.”

In the last thirty days, the level of short interest has fallen for most UK housebuilders, data from FIS Astec Analytics shows.

Shares in the UK’s biggest listed housebuilders fell between 26 and 33 percent in 2018 as housing data increasingly showed a severe slowdown in sales volumes and prices, blamed in part on the uncertainty surrounding jobs and growth after Brexit.

British property surveyors are the most downbeat about the short-term outlook for house prices in nearly eight years, a survey on Thursday showed, as buyers and sellers shy away from major financial decisions.

London and the South-East have led the slide in house prices and sales. Yet a Deloitte survey found construction in four regional cities is booming.

Investors are using that regional divide to guide their choices.

“We try to avoid those mostly focused on London, like Berkeley. We prefer Taylor Wimpey, Persimmon, and Barratt Developments,” said Lyxor’s Theveneau.

TARGETED STRATEGY

Data from FIS Astec Analytics shows short sellers are even differentiating between London-focused builders Berkeley and Crest Nicholson.

Crest Nicholson has seen short interest increase significantly, with a utilisation rate (percentage of total shares borrowed) as high as 32 percent.

Last year, Crest Nicholson pulled back from London, closing its office there in a bid to reduce its dependence on the UK capital’s faltering housing market where prices were falling and costs were rising.

“We have faced some challenges in London and with sales at higher price points where political and economic uncertainty has adversely impacted customer demand… this is likely to continue pending Brexit resolution,” it said in January.

The company which focuses on the south of England has moved into the Midlands in a push into more affordable areas, and has postponed opening its new South East division.

Rival Berkeley Group, which also has significant exposure to London, has meanwhile seen short interest fall since the Brexit vote.

Charlie Campbell, an analyst at Liberum, put this down to the housebuilder’s more international customer base which could insulate it from falling confidence among UK buyers.

Berkeley Group has sales offices in Dubai, Bangkok, Singapore, Hong Kong, Beijing and Shanghai.

Another strategy followed by some investors is to home in on stocks that could show more resilience in the face of slower sales and low buyer confidence.

Paul Mumford, fund manager at Cavendish Asset Management, owns Telford Homes because of its focus on building in non-prime, “up and coming” areas of London, and its policy of forward selling developments.

Mumford also owns Henry Boot, Daejan, and St Modwen, which he says are more insulated from the cyclicality of the housing market because they are more exposed to the commercial property market.

OVER-OPTIMISTIC?

How much of the hard Brexit scenario is discounted in housebuilder shares is key to investors seeking to find value.

Redburn analysts say current valuations factor in a roughly 30 percent decline in EBIT (earnings before interest and tax) this year, which would imply a 5 percent fall in house prices and 10 percent fall in volumes. The analysts have no sell recommendations in the sector.

That is a far more benign scenario than the 35 percent fall in house prices over the next three years predicted by Bank of England governor Mark Carney if the UK exits without a deal.

There is no date yet set for a new vote on May’s Brexit deal, but share prices have been climbing despite the lack of any clarity.

“The big question is not what happens today but where are we in the middle of summer, is all this behind us?” said Liberum’s Campbell.

“If it is, then the shares are pretty cheap, but if we’ve just gone through a disorderly Brexit you could look back at the shares and at this point in time you might think we were all a bit over-optimistic.”

Source: UK Reuters

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UK housebuilders under pressure

The UK housebuilding sector faces several challenges, all of which have weighed on its performance, but valuations still remain interesting.

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Help for housebuilders but a kicking for buy-to-letters

Housebuilders got a fairly clean bill of health from the latest government-sponsored review of their industry and more good news on state support is coming, from what I hear. But spare a thought for thousands of ‘mom and pop’ buy-to-letters, who look set for another kicking from ministers.

Conservative grandee Sir Oliver Letwin’s review into what he refers to as the ‘stately’ build-out rates of major housebuilders dismisses the industry’s bête noir – the widespread and long-held allegation that they ‘sit on their land banks’.

They don’t, he concludes, in the thinnish 30-page draft of his ongoing review: once they get full planning permission the diggers move in. The charge that their profitability depends on the appreciation of undeveloped land has always been a red herring, as I’ve previously argued.

But he does twig that their earnings are underpinned by “the sale of housing… by building only at the ‘market absorption rate’ for their products”.This revelation puts him in contention for my second annual ‘No S*** Sherlock Research Award’.

Since the year dot, most volume developers have built as fast as they can to maximise sales volumes, but no faster than would undermine local pricing – the absorption rate. About 0.7 homes per site per week has been the rule of thumb for most firms across most cycles.

Kicking in the long grass

The next stage of Letwin’s ruminations – to be published ahead of November’s Budget – will be to recommend how to increase the build-out rate. As a taster, he suggests builders provide a much greater variety of size, design, tenure and end market: “If housebuilders were to offer more variety of homes and in more distinct settings, then overall build-out rates could be substantially accelerated.”

I’m not so sure about that: the last time government got prescriptive about what builders built on their sites, insisting during the ‘noughties’ on providing three-storey ‘town houses’, most struggled to sell the things. Expect much kicking into the long grass…

Of much more consequence to housebuilders is the future of the government’s Help to Buy scheme. There has been much speculation, not least in this column, about whether the scheme, which offers interest-free government ‘equity loans’ to buy newly built homes, will be extended beyond its current 2021 cut-off. It now supports upwards of half of all private homes sold by some housebuilders and arguably a greater proportion of their profits.

Industry sources with the government’s ear tell me they are convinced it will be extended, albeit with some cosmetic tweaks (perhaps restricting it to first-time buyers or reducing the limit on maximum household salaries to below, say, £100,000). Expect an announcement in the Budget, I’m told. The scheme’s not without its critics, but there has been a mounting view in Whitehall that it is ‘too big to fail’.

In contrast, the government views the legion of buy-to-let entrepreneurs as ‘too small to save’. They’ve been battered by stamp duty hikes, even more damaging changes to mortgage interest relief and more red tape.

Now new housing secretary James Brokenshire is proposing that landlords should offer minimum three-year contracts, as opposed to the six- to 12-month norm. But tenants would be free to leave earlier. Not surprisingly, the National Landlords Association greeted this with apoplexy – but to no avail, I suspect.

A Conservative councillor and despairing buy-to-letter last year confided that a former housing minister told him: “We don’t want ‘mom and pops’ running the housing market.”

Source: Property Week

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The good times are over for UK housebuilders

The UK housing market has long benefited from the widespread belief that “you can’t go wrong with bricks and mortar”. And investors who bought housebuilders in recent years have been laughing all the way to the bank too. 2017 was a particularly good year for the sector, as stocks recovered from the unthinking sell-off that followed Britain’s vote to leave the EU in 2016.

But now, house price gains are slowing. In fact, prices in London fell last year, according to Nationwide, for the first time since 2009.

So is it time to take profits on the housebuilders?

The picture from housebuilders is pretty clear – the fun’s over

Recent reports from UK housebuilders paint a pretty ugly picture of the market overall.

Yesterday, retirement housebuilder McCarthy & Stone saw its share price plunge by 13%. It announced that its chief executive is set to step down this summer, and also that sales during the first quarter of this year had seen a “noticeable decline”.

What’s the problem? In short, said the builder, “a slower secondary market and a softening of pricing, particularly in the South East”.

As the FT points out, if second-hand homes are selling more slowly, that’s a bigger problem for McCarthy than for your average builder. The company is largely selling to people who are downsizing, rather than first-time buyers.

That exposes the firm to two big threats. Firstly, there’s the timing. If downsizes are taking longer to sell, with more deals falling through, then that naturally means that McCarthy & Stone’s sales will slow down too.

Secondly, a slower secondary market tends to mean falling prices. If downsizers make less money from the home they are selling, that means they have less to spend on their retirement property.

The situation is bad enough for downsizers as it is – these retirement properties are not cheap by any means, so the amount of money people hope to raise by moving house is often a lot smaller than they might have expected from hearing about years of property price inflation. Squeeze that too hard, and people might start to wonder why they’re bothering to move at all.

So it’s fair to say that McCarthy & Stone gives a pretty clear indication that the London market – and by a knock-on process, the market in the southeast – is struggling.

Crest Nicholson was another recent casualty in the sector. Last week, it warned that profit had dipped in the six months to the end of April due to “generally flat pricing” for its properties. It had also seen its costs increase.

The company is retreating from the London market. As chief executive Patrick Bergin put it: “even in the outer zones of London the pricing momentum is not with us, and absolute affordability is now quite stretched”.

The latest builder to warn on London is Berkeley Group (Full disclosure: I own Berkeley. I bought it in the post-Brexit vote panic when everything related to property in the UK and London in particular was being flogged off indiscriminately. It has a good track record of coping with the cyclical nature of the building industry).

This morning, the company posted a big jump in pre-tax profits for the year to the end of April 2018. However, the big profit was driven partly by investments in cheap land bought between 2010 and 2013, which means profits are set to fall sharply next year by comparison – about 30%, according to the company.

Tony Pidgley, the chairman of the group and someone who has done a pretty good job of weathering previous slowdowns, pointed out that “it is telling that some funders and builders are choosing to exit the market when faced with the degree of risk and regulation that now confronts development in the capital”.

The smart money is cutting back

It’s pretty clear from all this that the good times for London-focused builders are now in the rear-view mirror. But I suspect that’s the case UK-wide too.

As a non-local, I’m keenly aware that London is all too often treated as the centre of the universe by our media. However, when it comes to the UK property market, it does exert a pretty strong gravitational pull and you’d be stupid to ignore it.

London prices go up. That has a ripple effect – people who would have bought in London, buy in the southeast instead. Investors who can’t afford that then buy further out – for example, buy-to-let investors are now focusing further north, where they can still get yields that might just cover their costs if everything else goes 100% right.

But the ripple works in reverse too. The reasons behind the London slowdown – lack of affordability, alongside a realisation that being an amateur landlord is no longer a growth business – will have an impact across the board.

The bonanza days are over. The politics of Help to Buy will start looking precarious as tales no doubt emerge of early buyers under the scheme running into trouble when they try to sell. And a focus on affordability – which after all, is the key political issue here – suggests that the squeeze on pricing will continue.

Builders might find that they have to become more productive – coming up with innovative solutions as opposed to building ever more glorified rabbit hutches with multiple en-suite bathrooms. That would be a good thing, but it’s not likely to happen quickly and it’s not likely to be cheap to implement.

I also find it interesting that one of the smartest proponents of the case for house builders in recent years – Gary Channon of Phoenix (who run the Aurora investment trust) – cut the fund’s holdings in builders during the first quarter of this year from around 18% to 10%.

At the time, he noted: “Although housebuilders are good value and likely to deliver attractive long-term returns, we must recognise that the current conditions could not be more favourable in every regard and so it is reasonable to expect that the most likely future path is for a deterioration in some of these positives.”

In other words, “this is as good as it gets”.

Overall, I reckon that this marks the peak for this cycle on the housebuilding front. If you’ve made a lot of money in the sector, then good for you. It might now be time to look at protecting some of it (and yes, I’ll need to revisit my own portfolio and consider what to do about Berkeley).

Source: Money Week

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Softer housing market weighs on key sector

THE UK construction sector showed only marginal growth in February amid “entrenched political uncertainty”, as a soft patch for housebuilding continued and civil engineering activity fell, a key survey shows.

Commercial property construction was the bright spot in the sector, recording its fastest increase in activity since May last year.

The Chartered Institute of Procurement & Supply’s purchasing managers’ index edged up from 50.2 in January to 51.4 last month on a seasonally-adjusted basis.

This took it further above the level of 50 deemed to separate expansion from contraction but the February reading nevertheless signals only slight growth.

The UK construction sector’s new business volumes fell in February, the survey shows.

Howard Archer, chief economic adviser to the EY ITEM Club think-tank, said: “The purchasing managers’ survey indicates that the construction sector is having a lacklustre start to 2018.”

He added: “February’s reading was still only slightly above the 50 level that indicates flat activity.”

Tim Moore, associate director at IHS Markit and author of the construction survey, said: “The construction sector endured another difficult month during February, with fragile business confidence, entrenched political uncertainty and softer housing market conditions all factors keeping growth in the slow lane.

“Residential work appears on track to experience its weakest quarter since Q3 2016, suggesting that housebuilding is losing its status as the main engine of construction growth.”

Source: Herald Scotland

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UK housebuilders to prefabricate hundreds of homes in factories

One of Britain’s major housebuilders is to prefabricate up to a quarter of its homes in a factory, in the latest attempt by the construction industry to tackle the housing shortage.

Berkeley Homes, which builds 4,000 homes a year, is planning to create a facility in Kent next year where builders will work to produce up to 1,000 houses and apartments annually which will then be craned on to sites.

Another company, nHouse, is setting up a factory in Peterborough with the capacity to build 400 homes a year, complete with light fittings, bathrooms, bookshelves and kitchens. Production is expected to start in January.

It claims it can build a house in 20 days in the factory which can then be erected on site in half a day. Several other developers, including Legal and General and Urban Splash, have also launched prefab home divisions.

Fears of a shortage of skilled construction workers caused by an ageing workforce and an exodus due to Brexit are part of the reason for the revival of prefabrication, which last provided a significant number of homes after the second world war.

The government has set a target of building 300,000 homes a year by the middle of the next decade. Despite recent increases in activity, the last annual figure was 190,000.

A Berkeley spokesman said: “We have acquired a 10-acre brownfield site from the Homes and Communities Agency to build a factory for modular homes in Ebbsfleet, Kent. This will have the potential to deliver up to 1,000 homes a year.

“Construction of the factory could begin next year. While the speed of production and the impact on skills and labour are important factors, our real driver is the quality we can achieve with modular housing.”

The nHouse has been designed by the architect Richard Hywel Evans and is made in four modules from engineered pine panels which are transported on the backs of lorries and are then clipped together on site and connected to pre-existing services. Its built-in features include solar panels, a robot vacuum cleaner and even a drone landing pad – looking forward to a time of aerial deliveries.

A three-bed house is on sale to developers or individual householders from £170,000 to £185,000, which is about the same price as a standard house built using wet trades.

Nick Fulford, the director of nHouse, argues that with 100 workers operating on an indoor production line rather than on muddy building sites in the elements, the homes will suffer from fewer snagging problems.

Source: The Guardian

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UK housebuilders fall after ban on new home leaseholds

Shares in UK housebuilders fell on Thursday after the government banned the sale of new homes on a leasehold basis, starting immediately.

The government said new ground rents would be set at zero as it aimed to end “feudal practices” in Britain’s residential construction industry.

Leaseholds are traditionally applied to flats and apartment blocks where the upkeep of shared spaces is maintained by the building’s leaseholder, who charges residents a “ground rent” to pay for this maintenance.

Single-occupier ground rent

But more recently, some housebuilders have applied such charges to new, single-occupier builds for the permission to make changes to the property. It is this practice that the government aims to stop with the new rules.

Sajid Javid, communities secretary, said: “It’s unacceptable for home buyers to be exploited through unnecessary leaseholds, unjustifiable charges and onerous ground rent terms.”

McCarthy & Stone tumbles

The government estimates that about 1.4 million households across England are on leaseholds, up from 1.2 million in 2015.

The announcement hit shares across the sector. Worst hit was retirement housebuilder McCarthy & Stone, whose chief executive Clive Fenton (left) criticised the government’s actions.

He said: “The proposal to set all ground rents to zero will result in a disruption of housing supply and contradicts the government’s stated objective of seeking new sources of housing.”

The company had expected to generate nearly £33m in profits from freehold reversion sales in 2018. Shares in McCarthy & Stone tumbled 10.59% to 152p in the first hour of trade on the London Stock Exchange.

Other market reaction

Other housebuilders were also lower. Persimmon lost 1.14% to £26.91, while Barratt Developments shed 1.01% to 636.5p, Taylor Wimpey fell 0.82% to 204.3p and Berkeley Group slid 1.67% to £41.39.

Source: Capital.com