Stellar 2013 Hard to Top for U.K. Builders After 60% SurgePatrick Gower
By almost any measure, 2013 was a year to remember for Britain’s homebuilding industry.
Companies such as Taylor Wimpey Plc and Barratt Developments Plc, which spent years climbing back from a 2007 housing-market crash, saw share prices soar by around 60 percent on average for a second straight year as an improving economy, a surge in lending and government support for buyers combined to lift sales and profit.
Don’t expect shares to deliver a repeat performance in 2014, said Neil Hermon, a fund manager at Henderson Global Investors who oversees 656 million pounds ($1.09 billion) of stocks. Values will probably climb by no more than 20 percent this year as the stocks better reflect asset values and earnings and pressure grows to raise borrowing costs he said. Clyde Lewis, a London-based analyst at Peel Hunt, expects a similar gain this year.
“The economy is improving quicker than we thought,” London-based Hermon said by phone. “We’re going to get buffeted around by potential interest-rate rises.”
While Britain’s rebound will lift confidence and buying power, it will also put pressure on the Bank of England to raise a benchmark interest rate that has stayed near a record low since March 2009. The recovery also may prompt Prime Minister David Cameron’s government to scale back mortgage-assistance programs like Help to Buy that fueled the biggest home price increase in almost six years.
Britain’s housing bubble, driven by loose credit and speculation on buy-to-rent properties, burst in the second quarter of 2007, causing the Bloomberg U.K. Hombuilders’ Index to drop 80 percent in the two years through 2008. Even after the 159 percent gain in 24 months through 2013, the index’s value is about a third below its peak in April 2007.
Though share prices are lower, most of the biggest builders have shrunk since the crash in terms of sales and assets. Six of the seven largest companies on the index had lower revenue in the first half of 2013 than they did in the same period of 2006. The exception is Berkeley Group Holdings Plc, which is also the only one of those that didn’t report a single annual loss since the market slumped.
Redrow Plc led homebuilders with an 88 percent gain last year and Taylor Wimpey, Barratt and Persimmon Plc, the three biggest publicly traded companies in the industry, all advanced by more than 65 percent. The gains last year have made homebuilder stock values “less compelling,” Hermon said.
The average price to net-asset-value ratio leaped to 1.85 last year from 1.1 in 2012, according to Peel Hunt’s Lewis. That’s higher than the long-term average of 1.2, he said.
“Gone are the days where you’re looking at 20, 30, 40, 50 or 60 percent returns,” said Chris Millington, an analyst at Numis Securities Ltd. “You’ve got to be buying stocks with some unique characteristics or a good valuation story behind them, because going carte blanche and buying the sector is not something we want to be doing.”
England needs 250,000 new homes a year to satisfy demand, according to Shelter, a homeless charity. Developers built 107,950 homes in England during the year through November, according to the Office for National Statistics.
U.K. Private housing completions peaked in 2006 at 204,000, according to Millington. Sales volume will probably reach 150,000 in 2014 and companies are unlikely to build 200,000 homes for some time as they focus on returning cash to investors rather than expanding, according to Millington. Persimmon and Berkeley plan to pay out 1.9 billion pounds and 1.7 billion pounds, respectively, by 2021.
“You’ve only got the midcap quoted sector that’s looking to take market share and grow volumes aggressively,” Millington said by phone.
Companies that want to increase homebuilding volume may find it tougher going in 2014 as buyers are slowed by concerns about interest rates and the future of government programs like Help to Buy.
Gross domestic product increased by 0.7 percent in the fourth quarter, capping the best year for the U.K. economy since 2007. Surging home prices prompted the BOE to announce in November that it would end support for home loans under its Funding for Lending Scheme by the end of 2013.
“The attitude to interest rates is part of wider sentiment in the sector that includes what the government is going to do in the run-up to the election and after the election,” Peel Hunt’s Lewis said by phone.
The BOE’s decision to withdraw Funding for Lending for homebuyers underlined the strength of a housing market, where the average cost of a property has climbed to 176,491 pounds, according to JPMorgan Chase & Co. money managers Jonathan Ingram and John Baker. “It suggests the Bank of England views the lending recovery as self-sustaining, and that is a positive indicator,” they said by e-mail. House prices were up 7.3 percent in the three months through January from a year earlier, Halifax said in a report today.
While the central bank stepped back, Cameron’s government increased its efforts to back homebuyers by introducing the second phase of the Help to Buy plan in September, three months earlier than planned. The boost to homebuilders may be short-lived though as critics from the International Monetary Fund to U.K. Business Secretary Vince Cable express concerns that the programs will fuel a property bubble.
“I wouldn’t be surprised if the Bank of England pushes for the Help to Buy mortgage guarantee scheme to be diluted,” said Howard Archer, chief European and U.K. economist at IHS Economics & Country Risk. “There is no real need to have any stimulus for the housing market anymore. Low interest rates are stimulus enough.”