This article by Richard Watt of Money Observer on October 16th, 2013 reveals that property market in the UK has now regain its life and eager for further developments.
Housing has a unique place in the UK economy. There is a special sense of fulfilment in home-ownership.
‘First-time’
buyers have a priority on the political agenda, while rising home
values translate to near-instant voter gratification. A revival in the
housing market is front-page news.
This national attitude to our
homes creates a number of anomalies. One is the traditional approach to
investing in the housing market through direct purchase, buying or
upgrading a home or taking on buy-to-let. Home-ownership can be
immensely rewarding, but a house is a particularly illiquid investment,
while mortgages create a conduit from Bank of England base rates to
disposable income that is short, brutal and sometimes nasty.
The
flotation of Foxtons, the London-area estate agent, is a sign that the
equity market is increasingly providing an alternative route to
participation in the property market. A basket of shares might not keep
you warm at night, not in a literal sense, but it is a lot more liquid,
shouldn’t require a six-figure mortgage and its sensitivity to interest
rates is a little less direct.
The Foxtons IPO was heavily over-subscribed, rising 16 per cent on the first
day, valuing the business at more than £650 million. Foxtons has some
40 offices, mainly in central London. It is an exceptionally well-run
company, with special strength in marketing. The average price of its
house sales is £400,000, which puts it in the sweet spot in terms of
transaction growth as the recovery develops. It is the right section of
the market for the second phase of Help to Buy, which will provide
mortgage indemnity for homes worth up to £600,000. In our view, Foxtons
is in a position to increase its footprint potentially to 100 offices
and possibly more.
Foxtons is not the first estate agent to come to the market. Countrywide floated in March and has outperformed the FTSE All Share (ex investment trusts) by 40 per cent since then (to 24
September). Savills, since its near-term trough in the midst of the
eurozone crisis on 4 October 2011, has outperformed the FTSE All Share
by 134 per cent.
Estate agents are an interesting and expanding
area of the equity market, but the heart of the sector in equity terms
is the housebuilders. The sector has seen tremendous outperformance in
recent years, with key companies such as Persimmon and Barratt
Developments, which over the past three years have outperformed the FTSE
All Share by 126 per cent and 156 per cent respectively. In our view,
despite inevitable set-backs, the sector should continue to offer
robust, market-leading returns.
Current demographics suggest the
demand for new housing in the UK should run at around 260,000 units per
year, but the market is only supplying half that, around 130,000. It is
highly unlikely that supply will reach, let alone overtake demand, on
almost any scenario.
The block has been financing, with capital
constrained banks requiring significant cash deposits. The government –
and everybody who reads a newspaper or watches television or listens to
the radio – is aware of this and given the economic benefits of
house-building it has taken some bold measures.
The first phase of
Help to Buy, under which the government lends new home-buyers 20 per
cent of the price towards a 25 per cent deposit, is already having a
significant impact, with 30 per cent of new-built homes being reserved
through the scheme.
The second phase starts in 2014, providing
mortgage guarantees, and should stimulate the market further. The
schemes are intended as temporary kick-starts, but the first phase is
proving so popular its £3.5 billion funding is likely to expire at some
point in 2015 – a date whose proximity to the next election suggests to
us it could be replaced, should need arise, by something either as good
or better. In the meantime, the banking sector should by then be further
on the road to recovery, opening the possibility that affordable
commercial mortgages will increasingly become available.
A less
publicised but important change is in planning law. Under the new
National Planning Policy local authorities are required to maintain a
five year plan. In the absence of such a plan, where any planning
application is denied, it will be automatically granted on appeal.
This
has unleashed fresh tracts of buildable land, a flow unlikely to be
completely staunched as plans come to be adopted more widely. So much
for the environment – what about the stock specifics? Housebuilders have
done well – is there more to come? In my view there is and the numbers
tend to support a positive argument. The key decision is whether the UK
property market will continue to recover into the medium to longer term.
Let’s
take Barratts as an example. We believe it is capable of achieving a
return on equity of around 18 per cent on a two to three year view as it
builds out land acquired in recent years at attractive profit margins.
We expect the industry to be building around 170,000 units a year by the
end of this period, significantly higher than current levels but still
well below the demographic requirement. From this level, it fair to
assume that Barratts’ unit sales can continue to grow at relatively
modest minimum of 4-5 per cent a year – given natural demand, government
support and ongoing economic recovery – that would leave Barratts with
around 75 per cent of its earnings free to distribute as cash to
shareholders, which at current share prices implies a dividend yield at
around 10 per cent. That is a high yield for a well-run business in a
growing market and we would expect most investors to accept something
significantly lower, possibly down to around 5 per cent – and that, in
turn, implies a much higher share price.
One of the most
satisfying aspects of investing in UK mid-cap equities is the dynamism
and variety of the opportunities. As the property market comes back to
life, it is likely there will be mid-cap companies there to reap the
benefits. And as they say in the property business – we are eager for
further developments.
Article Source: http://www.moneyobserver.com/news/13-10-16/opportunities-uk-property-market-comes-back-to-life
No comments:
Post a Comment