Opportunities as the UK Property Market Comes Back to Life

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

U.K. House Prices Increase to Record on London Property Surge

This article by Fergal O’Brien of BloombergBusinessweek on September 12th, 2013 reveals the increase of house prices in the UK and property market in London continued to soar.

U.K. house prices rose to a record last month as government measures boosted demand and London’s property market continued to surge, Acadametrics said. 

Values increased 0.4 percent from July to an average 233,776 pounds ($370,000), the London-based real-estate researcher and LSL Property Services Plc said in a report today. In London, prices have risen 40 percent from their peak in April 2009, compared with 16 percent nationally.

The Bank of England-run Funding for Lending Scheme has helped to cut mortgage costs, while Chancellor of the Exchequer George Osborne’s Help to Buy program allows people to purchase a home with a deposit of as little as 5 percent of the value of the property. The BOE has downplayed speculation that a bubble may be brewing, saying activity is still at a low level relative to its pre-crisis peak.

“The property market has turned over a new leaf after years of restrained activity,” said Richard Sexton, director LSL unit e.surv. “The government has been pivotal in providing the aid that the market has been craving for many years.”

Eight of the 10 regions tracked by LSL recorded price gains in the latest three months compared with a year earlier. In the southwest and Wales, where values fell, the declines eased, according to the report.

Acadametrics estimates that completed housing transactions exceeded 70,000 in August for a second month. That would mark the first time that sales over two consecutive months have been above that level since November-December 2007, when transactions were 104,486 and 84,524.

BOE Governor Mark Carney said yesterday that while the market is improving, activity levels, mortgage applications and valuations are still low. He also said prices will continue to increase and the Financial Policy Committee of the central bank will be “vigilant.”

“It is still too early to predict what impact the economy will have on prices, especially as the FPC may apply downward pressure through controls over mortgage supply and pricing,” Sexton said. “Thus nothing can be set in stone yet.”

To contact the reporter on this story: Fergal O’Brien in London at fobrien@bloomberg.net

Article Source: http://www.businessweek.com/news/2013-09-12/u-dot-k-dot-house-prices-increase-to-record-on-london-property-surge