Home Builders Have Solid Foundation For 2018

2017 started off on a cautious note for the home building sector as the industry couldn’t escape the talk of potential doom and gloom that Brexit would unleash, but business carried on as usual.

The talk in the media was different from that on the ground of construction sites – as completion rates and average selling pricescontinued to tick higher. Forward sales and work in the pipeline was promising too.

The interest rate cut by the Bank of England (BoE) in August 2016 and the increased stimulus package, made borrowing cheaper, and British properties became relatively more affordable for international investors as sterling weakened. Not only did the BoE make mortgages more competitive, they sent a message to the markets they would support the economy through monetary easing.

The share price of the house builders at the start of the year were recouping the losses incurred in the wake of the EU referendum. On the run up to the vote, economists predicted average house prices in the UK could fall up to 20% if the public voted to leave the EU, so the share prices of the homebuilders sold off-severely in the wake of the vote. As the sharp downturn in the housing market didn’t materialise, the share price of the house builders rallied.

Persimmon (LON:PSN), Bovis Homes (LON:BVS), Barrett Developments and Berkeley Group (LON:BKGH), are currently trading above their pre-EU referendum levels, and have gone on to set fresh record highs this year. Taylor Wimpey (LON:TW) is currently trading above its pre-EU referendum mark, but it hasn’t reached its all-time high. This is a sector that clearly shrugged off the much warned about Brexit blues, and has returned to flying form.

The British Chancellor, Phillip Hammond, wants to fix the ‘broken housing market’. In the autumn budget Mr Hammond pledged in excess of £44 billion over the next five years through various initiatives like loans, guarantees and capital funding.

Mr Hammond also revealed a plan to help him win over younger voters, by scrapping stamp duty for first-time buyers on all properties worth up to £300,000. If the property is worth up to £500,000, no stamp duty will be paid on the first £300,000 of the purchase.

Different house builders operate in different parts of the country and target different markets. York-based Persimmon focus more on northern England, the West Midlands and Wales. Since property prices are on average lower in these parts of the UK than in the south east England, that is reflected in the selling price of homes by Persimmon.

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Whereas Berkeley Group concentrates more on luxury end of the housing market and are very much focused on London. Average house prices in the capital have comfortably exceeded the pre-housing crash level, and have now started to cool a little, so that is more likely to have an impact on Berkeley Group than any of the other companies in the sector.

Construction companies with a lower average selling price of their houses are more likely to benefit from scrapping of the stamp duty for first-time buyers. Persimmon have the lowest average selling price of the listed homebuilders, and it’s in the region of £214,000. Taylor Wimpey and Bovis Homes have average selling prices in the region of £282,000. Whereas a house build by Berkeley Group will set you back on average of £675,000.

Homebuilders that sit on land banks will come under pressure to develop the sites and increase the housing supply, as part of Mr Hammond’s new initiatives. Some people have been critical of home builders for deliberately taking their time to develop the land as a way of only slowing increasing the housing stock supply. This may quicken the pace at which new homes come on the market. Some construction companies may have the desire to build, but not have the resources to develop land, as they might be held back by labour constraints.

The third-quarter Royal Institute of Chartered Surveyors (RICS) UK construction and infrastructure survey stated that workloads were stable despite intensification of labour shortages’. Activity in public and private housing sectors increased by 12% and 33% respectively, which is encouraging to see. Higher input costs and concerns about skill shortages also an issue.The government has been pushing apprenticeships, but less than half of those surveyed feel those their current apprentices will be a long-term solution.

A poll carried out on behalf of RICS showed that over half of the construction workers in the UK are worried about the possibility of skills shortages as Britain prepares its exit from the EU. A survey undertaken in the earlier part of the year found that approximately 8% of workers in the construction sector are from the EU. Securing the rights of EU nationals in the UK, and British citizens in the EU is one of the major components of the Brexit debate.

Phase one of the Brexit negotiations stated that EU nationals residing in the UK will have their rights protected, and there is a reciprocal agreement for British citizens living in the EU. This news should provide some confidence to the construction sector in short-term. As we are a long way from knowing what the deal will look like, the concerns about skill shortages are likely to persist.

The UK construction purchasing managers index (PMI) noticeably saw a drop off in activity towards the back end of the year. A reading above 50.0 indicates expansion in the industry and the year stared off in the low 50’s, picking up a high of 56 in June – an 18 month high, only to drop to contractionary territory in September. The sector swung back into expansion territory in October, but it clearly shows a slide in activity as 2017 draws to a close.

Unlike the banking industry the homebuilding sector isn’t dogged by controversy and fines. Although Taylor Wimpey did have to set aside £130 million earlier this year in relation to a leasehold scandal. The company had had a clause in the fine print that the ground rents under leasehold properties would double every year - which could make re-selling them very difficult

Persimmon was the strongest in 2017 as the stock climbed 48%. This year the company saw revenue climb by 8.1% to £3.1 billion, while net income jumped by 19.9% to £633 million. Analysts are anticipating next year’s revenue and net income growth to be 9.4% and 22.4% respectively. Persimmon has a dividend yield of 5.3%, and there was not change to the dividend this year. In 2018 the dividend is tipped to increase by 23.3%.

Taylor Wimpey was the weakest of the punch as it only rose by 27%. In 2017 the revenue and net income grew by 17.1% and 16% respectively. The forecast is for revenue to grow by 6.8% and for net income to grow by 16.3% in 2018. The dividend yield is 2.3% and the dividend grew by 10.9%, and analysts are expecting the dividend to jump by 25.5% next year.