The long-anticipated slowdown in the UK housing market has left growth managers divided over the fut...
The long-anticipated slowdown in the UK housing market has left growth managers divided over the future of house building stocks. Key points of argument are the extent to which the downturn has already been built into the price of sector stocks and the importance of the London market for the industry.
The speculation comes at a time when housing stocks are performing well in the FTSE All Stocks index. The construction and building materials sector has gained 20.61% from the start of the year to May 19, the third best performing sector in the market.
Alastair Stewart, building and construction analyst at stockbroker Seymour Price, warns that house prices in London have already started to fall and house builders are heavily exposed. He says: 'London and the south east accounts for at least 30% of many groups' housing sales.'
One of his main concerns is that there will be a dramatic downturn in buy-to-let properties and those aimed at first-time buyers who have been priced out of the market. Stewart says this would damage firms which rely on this segment of the market for a large proportion of its sales, such as the Berkeley Group.
Trevor Green, UK equities fund manager at DWS, believes signs that some firms are offering sweeteners such as low deposits for their properties in London shows they are getting desperate.
However, Derek Mitchell, director of UK equities for Isis, believes that while some market watchers are anticipating a crash, others are banking on a milder slowdown. He says: 'We are firmly in the slowdown camp. We are expecting house price inflation of about 4% this year. We see the same number of homes being built and believe the demand is still there.'
Errol Francis, director of UK equities at Barings, adds: 'We need to build 220,000 homes a year to meet demand. At the moment we are building 150,000. We have not got the overbuild problem of the late 1980s.'
He says the market is also bolstered by low unemployment and interest rates, neither of which he believes is likely to rise for some time. Low P/E ratios on house building stocks, now averaging 5.6 times, adds to Francis's confidence that the slowdown has already been priced in.
Crispin Finn, senior UK portfolio manager for Credit Suisse, says: 'The P/E ratios are close to asset value so the market is less exposed to a downturn.'
But Stewart maintains: 'P/Es appear low, but there has not been the re-rating many have predicted. If profits do flatten out or fall, we believe share prices could fall in line with earnings.'
Green, who has underweighted construction stocks in his portfolio, also believes that two-thirds of construction stocks are trading at their net asset value or above, making them a poor investment.
Mitchell is more optimistic, however, believing much of the pessimism is down to the traditional underperformance of the sector at this time of the year and a mistaken belief that London's property market reflects that of the rest of the country.
Nonetheless, it remains a stockpicker's market. Finn says: 'Choosing stocks is a difficult call. But you have to look at management people who would be prepared to back up a long-term business.'
Inflation remains at low levels.
Sector P/E ratios are low.
UK housing shortage to drive demand.
London house prices beginning to fall.
Many groups are south east focused.
Construction firms are offering sweetners.
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