U.K. Homebuilders Buying Land Below 2007 Peak Set to Profit
U.K. Homebuilders ‘Making Hay’ From Cheap Land
Chris Ratcliffe/Bloomberg
Prices of brownfield sites, which are abandoned or underused industrial and commercial land, are about 46 percent less than their 2007 peak, according to Savills Plc.
Prices of brownfield sites, which are abandoned or underused industrial and commercial land, are about 46 percent less than their 2007 peak, according to Savills Plc. Photographer: Chris Ratcliffe/Bloomberg
U.K. homebuilders are profiting from cheap land purchases just as property prices start to fall.
Developers are able to buy land for as little as a third of peak 2007 prices, London-based Savills Plc estimates. Those savings will more than make up for any weakness in the property market in the next three years, according to a shareholder in the industry’s biggest company.
“Some investors feel like they’re buying houses and not operating businesses, which is a mistake,” Gary Channon, chief investment officer of Phoenix Asset Management Partners, said in an interview. “Right now, housebuilders are making hay.” Phoenix owns 5 percent of Barratt Developments Plc.
The Bloomberg EMEA Home Builders Index has declined 21 percent this year as the prospect of the biggest government spending reductions since World War II undermined confidence in the housing market because of likely job cuts. Britain’s benchmark FTSE 100 Index is little changed in that period.
Prices for abandoned or partially developed land, known as brownfield sites, in the southeast of England have dropped about 46 percent since the market’s peak, according to Savills. In the north of the country, values have fallen as much as 71 percent, the property broker said in a July 15 report.
Barratt agreed to buy land for about 527 million pounds ($816 million) in the 12 months through June, giving the company enough plots to build on for the next 5 1/2 years. Because of accounting rules, the latest margins are based on land purchases made three years ago, when prices were skyrocketing.
Wider Margins
Operating profit in the six months through June equaled 5.9 percent of sales compared with 1.8 percent a year earlier, Barratt said yesterday. Margins in the industry may average about 15 percent within three years, according to Chris Millington, an analyst at Numis Securities in London with a “buy” rating on the stock.
“Even with a fall of 10 percent in house prices, we’ll produce very creditable margins,” David Ritchie, Chief Executive of Bovis Homes Group Plc, said in an interview.
Bovis, the smallest publicly traded U.K. homebuilder by volume, increased its operating profit margin to 4.2 percent in the first half from minus 2.2 percent a year earlier. Persimmon Plc, the U.K.’s third-biggest homebuilder, said last month that its profit margin widened to 8 percent from 1.6 percent.
‘Unrealistic’ Forecasts
Not everyone’s optimistic about earnings prospects in the industry. Robin Hardy, an analyst at KBC Peel Hunt in London, said forecasts for improved profitability may be unrealistic.
“If house prices conspire against them, it could become increasingly difficult for these companies to rebuild margins,” he said in an interview. Hardy has “sell” ratings on Barratt, Persimmon and Bovis.
Home values fell the most in six months last month as an increase in properties on the market gave buyers more bargaining power, Nationwide Building Society said on Sept. 2.
A report published yesterday by Halifax, the mortgage lending division of Lloyds Banking Group Plc, said prices unexpectedly rose for a second month. Still, the pace of economic growth is unlikely to be sustained and prices will probably “remain static” this year, said Martin Ellis, an economist at Halifax.
“We see value in some of the housebuilders, based on our valuation of their land banks,” said Jeremy Cave, an analyst at MF Global with a “sell” rating on the shares. “But I can’t see the economic drivers that will result in the sector performing very well for the next couple of years.”
No ‘Seasonable Blip’
Hometrack Ltd. said on Aug. 30 that there is a growing weakness in demand for residential properties that’s more than just a “seasonal blip.” The market probably won’t recover until 2012, Savills said in a report last month, a year later than the London-based property broker predicted in November.
Prices will drop 2.5 percent this year and 1 percent in 2011, Savills said, as potential homebuyers find it harder to borrow money because of rising unemployment and tax increases stemming from government efforts to cut the deficit.
“I don’t subscribe to the double-dip theories,” Mike Farley, Persimmon’s chief executive officer, said in an interview. “There is no reason to expect any change for the worse in the mortgage market.”
Prices for new homes are less volatile than the market as a whole because the builders set uniform prices for each type of property in an individual development, Channon said. In the secondary market, similar houses on the same street can have widely different prices.
Channon, 42, traded derivatives at banks including Goldman Sachs Group Inc. before helping to form Phoenix in 1998.
The asset manager has owned more than 3 percent of Barratt since May 2008. It doesn’t own shares of any other homebuilders.
While home sales may not return to peak levels anytime soon, investors shouldn’t write off the builders, Channon said.
“They’ll get through this and show that they’re actually very profitable,” he said.
To contact the reporter on this story: Tim Barwell in London on tbarwell@bloomberg.net.
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