Especially since the EU referendum, the domestically-focused housebuilding sector has been a bit like marmite to UK equity investors, satisfying to some, repulsive to others.
Some, like Neil Woodford and Mark Barnett have declared their love for what they view as an unloved and underappreciated space. Others like Neptune’s Robin Geffen, Investec’s Blake Hutchins and Brian Cullen at SW Mitchell have either lost faith in the builders’ ability to dig themselves out of the Brexit sized hole or believe stocks still look too expensive.
“Quite clearly we don’t believe in this thesis that the housing market will ride on and housebuilders will churn out increasingly profitable new developments,” said Geffen, Neptune CEO and income fund manager.
Expressing a preference or aversion to the cyclical builders almost serves as a kind of litmus test for how one views the strength of the UK economy.
While speaking at AJ Bell’s Investival conference last week, Barnett, who manages the £10.5bn Invesco Perpetual High Income fund, was generally pretty confident about the prospects for the domestic economy, citing better than anticipated earnings growth.
“It is highly unlikely the Brexit negotiations will end in a stalemate,” he said, before devoting five minutes of his presentation to the unloved London real estate sector.
If this latest batch of results from the housebuilders and property developers is anything to go by, the jury is still out on the stability of the sector.
Taylor Wimpey’s third quarter figures painted a much more stable growth story than peer Persimmon’s, but was not devoid of potential red flags – higher inflation impacting the cost of building materials from 3 to 4%, for one.
Persimmon’s share price was also wobbly after posting its third quarter update the week before, which some speculated was because of its reliance on the Help to Buy scheme. About 55% of sales came from the government-backed initiative that provides first-time buyers cash to get on the property ladder.
And although housebuilders’ shares were pumped up after prime minister Theresa May promised to inject an extra £10bn into the Help to Buy scheme, they have since corrected and in some cases, are trading slightly lower.
Clearly, a lot is riding on the provisions of the upcoming Budget. But in the short-term, Liontrust macro thematic co-head Jamie Clark, thinks the political commitment to the builders should help allay investors’ fears.
“Inevitably Help to Buy is part of the base case for these stocks,” says Clark. “I don’t see much evidence of this ending any time soon. You may see it tweaked, but the promise of an additional £10bn at the Conservative party conference suggests to me that the sector is underwritten in the very near term.”
And in the event of a regime change and a Jeremy Corbyn-led government, the builders still look to be in safe hands, he notes, especially since the current Labour leader has said he plans to extend the Help to Buy scheme.
