He believes this process is linked to the transition from capital to income growth which is underway.
Over the last three years, the house builders have seen their shares perform strongly as recovery came through. However, this stage could be coming to a close. As capital growth is being replaced by income growth, it could be time for growth-orientated portfolios to exit, while those seeking yield should stay on board.
Two schools of thought
Research conducted by Brewin Dolphin concludes that there are two schools of thought emerging on the house building sector.
The first is that while the underlying demand for new homes exceeds supply, and that the number of new housing starts is well below the number produced at the peak of the last cycle, then there is still upside ahead. The second is that the housing cycle will turn down in due course and that, when it does, it could do quickly.
With the potential risks of rising interest rates, tightening mortgage lending criteria and falling demand from overseas buyers, upside is now limited. While we would agree that data is not yet suggesting a turning point in the market, the ratings of the shares in the sector suggest that capital growth will be more difficult to achieve.
Outperforming housing stocks
House building stocks have significantly outperformed the UK over the last three years. However, as the companies now look to return surplus cash to shareholders, total returns are likely to be underpinned from the prospective dividend yields, i.e. income growth will take over from capital growth.
Williams believes that portfolios looking for capital growth should now consider reducing holdings in the house building sector as the majority of the recovery has now been seen.
Companies that have already outlined their capital return programmes are looking the most promising. These include Berkeley Group, Galliford Try and Taylor Wimpey. Which boast yields of at least 5.8%. Least favoured stocks under this scenario would be Barratt Developments and Redrow, according to Williams.
Positive outlook
There is potential in the market to offer an optimistic stance on UK commercial property, according to Fiona Rowley, fund manager of the M&G Property Portfolio since 2007.
“After £20bn was transacted in the last quarter 2013 and a strong performance in December, we expect a more normal level of activity throughout 2014,” she said.
But there is still reason to believe that capital growth is building momentum.
“An improvement in property fundamentals, boosted by increasing regional investor activity and a narrowing gap between prime and secondary yields point towards a positive outlook for UK commercial property.”
