UK housebuilders are a far cry from the leveraged horrors that nearly went bust during the financial crisis.
Balance sheets have been repaired and most carry little or no debt, which is prudent given the inherent cyclicality of the industry. Most of these firms are sitting on high-quality land banks that have been acquired post-financial crisis in a relatively benign land price environment.
There has also been a shift to strategically acquired land, which is a less risky option to buying the land outright. Since the financial crisis, it has become increasingly difficult for small, private builders to compete and several have exited as the industry becomes more consolidated.
Strong demand
In the UK there is a dramatic undersupply of homes despite an abundance of available land. The Financial Times recently reported the Government owns enough land to build two million homes. The Home Builders’ Federation has suggested the growing population needs 200,000 homes a year while other estimates put this number closer to 300,000.
These numbers eclipse the 108,000 private and 29,000 public homes that were built over the past 12 months. It is not surprising that over the past couple of years house prices have risen sharply (2014 +7.2%, 2013 +8.4%) but the pace of UK house price growth is slowing. The average price of a home rose 0.9% from November to December which was the sixth consecutive month of a falling annual growth rate.
We expect a further moderation in this growth over the coming year with prices nationally predicted to increase in a range of 3-5% in 2015. This reversion to a more ‘normal’ level of activity should help prevent supply chain problems and keep spiralling labour costs under tighter control.
Despite the level of house price inflation, age 12-month forward dividend yield of 5% compared to the UK market which trades on 4%.
Indeed, across the 34 sectors within the index only four have higher yields (oil & gas producers 5.7%, electricity 5.6%, mobile telecoms 5.2% and oil services 5.2%).
Given the supply and demand imbalance, the growth prospects for the housebuilders are arguably far superior to oil, utilities or mobile telecoms and, unlike these four high-yielding sectors, housebuilders are improving both margins and returns while being forecast to deliver at least double-digit revenue growth.
The regional pattern prevailing in 2013 remains in evidence, with the South of England recording significantly stronger rates of house price growth than the rest of the UK. As a result, we are eager to weight our exposure towards housebuilders that have more exposure to this region of the UK. L analysis from the Bank of England indicates that housing is more affordable now than in the run-up to the crisis.
Consumer credit continues to improve as mortgage lending becomes increasingly diversified. Mortgage approvals dropped again in November, to a 17-month low, but it was the smallest monthly decline since the downward trend began in early 2014. Mortgage rates have started to reverse their earlier upward trend and lenders expect demand for loans to hold steady in the first quarter of 2015.
The waiting game
George Osborne’s plans announced in December to reform how stamp duty is calculated should help stimulate activity particularly in the South of England where house prices are higher. One of the key uncertainties is the General Election in May.
Should the Labour party win a majority, Ed Miliband has promised he will implement a mansion tax. In the run-up to the election, it is possible that uncertainty around the issue will see property prices and activity falling as people adopt a wait-and-see approach.
Housing demand, however, should continue to be supported in the long term by a growing economy, rising employment levels, low mortgage rates and the first gain in real earnings for several years.
Strong growth prospects
Over the past couple of years, shareholders have been rewarded by an extremely progressive
dividend policy. Our eight-stock housebuilder peer group trades on an aver- age 12-month forward dividend yield of 5% compared to the UK market which trades on 4%.
Indeed, across the 34 sectors within the index only four have higher yields (oil & gas producers 5.7%, electricity 5.6%, mobile telecoms 5.2% and oil services 5.2%).
Given the supply and demand imbalance, the growth prospects for the housebuilders are arguably far superior to oil, utilities or mobile telecoms and, unlike these four high-yielding sectors, housebuilders are improving both margins and returns while being forecast to deliver at least double-digit revenue growth.
The regional pattern prevailing in 2013 remains in evidence, with the South of England recording significantly stronger rates of house price growth than the rest of the UK. As a result, we are eager to weight our exposure towards housebuilders that have more exposure to this region of the UK.