Stephen Bailey

Housebuilders’ prospects remain underpinned

Stephen Bailey

The UK Chancellor’s Budget statement last week focused on addressing the challenges of housing supply. One of the key features was the launch of a review into ‘land banking’, which weighed on the share prices of listed housebuilders. We not only believe that the market overreacted to the review but also that housebuilders will benefit in the long-term from the likely failure of Budget measures to adequately address the housing shortage.

Among a number of policies announced in this year’s Budget, Philip Hammond revealed that a review will be made into ‘land banking’– housebuilders sitting on land where planning permission has been granted without building new homes. While this practice does act as a friction in the property market, its prevalence has actually been on the decline. One of the reasons for this is that land inflation over the last few years has been relatively benign. Housebuilders learnt some harsh lessons from the financial crisis and it's unlikely we will see these companies committing capital to extensive land banks. The new model is far removed from that of a decade earlier, with the majority maintaining relatively shorter land banks.

The housebuilders we have invested in as part of the Infrastructure Spending theme – Barratt Developments, Taylor Wimpey and Persimmon – have increasingly looked to return excess capital to shareholders rather than allow it to be tied up in undeveloped sites.

Hammond is also not the first to launch a review into this practice. There have been five reviews since 2004, each concluding that no land banking has occurred and we doubt the upcoming review will conclude differently.

Further, the Chancellor promised to scrap stamp duty on property values under £300,000 for first-time buyers, or on the first £300,000 on properties up to £500,000. While we were disappointed that there were no comments on the extension to the Help to Buy scheme, we expect more demand for housing from first-time buyers. Areas outside of London, where house prices are more affordable, will appear attractive. As the graph below shows, while the average house price in London is around £484,000, in other regions they are mostly below £300,000, allowing first-time buyers to fully take advantage of the new stamp duty measure.

Stephen Bailey: Housebuilders’ prospects remain underpinned

Source: ONS

This will be most beneficial for listed housebuilders, which have significant exposure to lower value new builds as well as brick manufacturers such as Forterra and Ibstock. The housebuilders that we invest in also have around a 40% exposure to the first-time buyers’ market and a nationwide footprint.

Another headline initiative from the Budget was the pledge to add an average of 300,000 new homes by the mid-2020s, up from around 200,000 currently. We think this is much easier said than done and question how the extra homes will be delivered. Hammond proposed £44bn in investment and loans over five years, part of which will be set aside to incentivise small and medium (SME) sized builders. However, we’d suggest that the Chancellor’s objective may still be out of reach as, by definition, SME builders are not volume producers. Moreover, the present shortage of skilled workers in the housing industry emphasizes the challenge the government faces.

There is the option of new innovations such as modular pre-formed housing, which has been popular in Germany. We have exposure to this through German residential real estate company Vonovia and UK life insurer Legal & General Group, but even with alternative housing solutions, the government may still struggle to meet its target.  

The implication of a lower than expected increase in housing supply and higher demand from the Chancellor’s other measures would be a rise in house prices, and a boost for housebuilders. We believe housebuilders’ value remains underpinned by solid fundamentals with Help to Buy smoothing out the cyclicality of the housing market. On valuations grounds, the sector trades at a substantial discount to the market and yet offers an attractive yield premium. We suggest the market is perhaps being overly cautious about a sector we continue to regard as attractive to investors.


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Wednesday, November 29, 2017, 12:19 PM