Sentiment towards the housebuilding sector has improved as market consensus that UK interest rates h...
Sentiment towards the housebuilding sector has improved as market consensus that UK interest rates have peaked, grows.
The sector suffered a derating in September last year after the Monetary Policy Committee of the Bank of England began increasing interest rates. Companies such as Barratt Developments' saw its P/E ratio fall to 7.88 times from 9.71 times during September 1999.
Housebuilders are now benefiting from the belief that the interest rate raising cycle is near its end, although the sector is still trading below its level this time last year. The FTSE All Share Construction and Building Materials Index is down by 7.83% in the 12 months to 12 May.
Simon Atherton, UK fund manager at Aberdeen Asset Management, says: "One of the reasons that having a low interest rate peak is good for housebuilders is that this will produce less volatile earnings and the market will say that the quality of these earnings will be higher. The stocks should then have a higher rating.
"We are broadly supportive of housebuilding companies going forward. These are never going to be high growth companies but they should have upside."
Atherton holds stocks including Berkeley Group because of its exposure to the high net worth housing markets of South East England. Berkeley Group is on a P/E of 8.46 times and the stock has seen its share price fall by 28.14% in the year to 16 May.
Mark Hall, UK fund manager at BWD Rensburg is less keen on the sector but holds Bellway as a trading play on the back of its low valuation. Bellway is on a P/E of 6.57 times and has seen its share price fall by 30.64% over the 12 months to 16 May.
Hall says: "Bellway is based up in Newcastle and the management has seldom put a foot wrong over the last five to 10 years. At one point the stock was on a P/E of around four times and was yielding 6% - it had got ludicrously cheap."
He adds that a boost for the sector has been a bid from management to take over housebuilder Fairview Holdings last month, which has led to interest in these stocks increasing. Fairview Holdings' share price rose by 27.1% on 27 April, the day the bid was announced.
Over the long run housebuilders are unattractive intrinsically as they do not have a lot of free cash flow, Hall adds. Cash generated from housebuilding goes into land and as land prices go up these companies have to plough more money into expanding their land banks.
"The top of the interest rate cycle may be 6.5% or 7% but what is important is that it will not be reaching levels of 12% to 13% which we saw during the last recession." He says: "Housebuilding has never performed well when rates are rising.
"If the market feels that short term interest rates have peaked that would be bullish for housebuilders. If we are going to have interest rates at low levels that means house prices are going to rise as more people can afford to buy better houses. The houses in demand are one and two bedroom flats and four to five bedroom detatched properties, but UK housing stock is mostly made up of two to three bedroomed terraces and semi-detached houses."
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