Advertisement
Features

Dark clouds gather over housebuilders

Housebuilders have been a good bet for investors, says Sarah Moore. But that could be coming to an end.

883-Bellway-634
Housebuilders have done well, but investors should fix the roof while the sun shines and sell

Persimmon, Britain's largest house-builder, faced a backlash recently when it was revealed that an ill-considered incentive scheme for its chief executive put him in line for a £100m bonus, the UK's most generous such payout ever. In total, it will award almost £800m to roughly 140 senior staff.

Persimmon is not the only housebuilder handing out huge bonuses, and shareholders may well question whether they're happy to stick with firms that spend so much of their profits on lining executives' pockets.

Advertisement - Article continues below

But beyond the vexed issue of pay, it's fair to say that housebuilders have been a good bet for investors. Last year the sector outperformed the FTSE All-Share by about 30%. That was partly because share prices started at low levels due to uncertainty following the vote to leave the EU, but they've been a good long-term bet too anyone who had owned Persimmon for the past five years, and reinvested their dividends, would have made almost 270%, compared with just 41% for the FTSE All-Share.

Advertisement
Advertisement - Article continues below

The question now is can the good times continue? There are "signs the bright picture might be about to darken", warns Aime Williams in the Financial Times. House-price growth in the UK and in London in particular is slowing, while rising costs are squeezing builders' margins. Last month, fund manager Mark Swain of Smith & Williamson announced that the firm was "short" (ie, betting on share-price falls) on a number of housebuilders, and long only on one Bellway (which is broker Liberum's top pick, thanks to its track record of profitable volume growth and an attractive valuation, notes Investors Chronicle).

Advertisement - Article continues below

Swain notes that there are several headwinds for investors: no extension of government help-to-buy subsidies, which are set to end in 2021; a potential government investigation into "land banking", where housebuilders artificially restrict supply by holding on to land rather than starting on new developments where permission to build has been given; a shortage of skilled workers; and high valuations (companies such as Persimmon are expensive trading on a price/book ratio of 2.8 "above the previous peak levels seen in early 1990s and 2006").

On the other hand, fund manager Neil Woodford has doubled his firm's stake in Crest Nicholson, making it the company's biggest shareholder. Woodford bought into UK housebuilders last year, viewing them as bargains after the Brexit vote. (Though based on his recent unfortunate record, the purchase isn't necessarily a ringing endorsement.)

For MoneyWeek, the big risk is that housebuilding right now finds itself at the sharp end of both politics and economics. Government support and ultra-low interest rates have helped the sector for many years, driving profit margins to record or near-record highs. But monetary policy is tightening now, while a cavalier attitude to voters' views on excessive executive pay won't convince the government (even assuming that Jeremy Corbyn doesn't get in) to renew its help for the sector. On balance, we'd take any profits now.

Advertisement
Advertisement

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Beyond the Brexit talk, the British economy isn’t doing too badly
Economy

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019
There's still plenty of potential for investors in commercial property
Property

There's still plenty of potential for investors in commercial property

Jitters over the outlook for the commercial property sector are overdone, says Max King. Investors should consider this Europe-focused real-estate inv…
4 Aug 2020
Businesses must be bold if they want to survive
UK Economy

Businesses must be bold if they want to survive

It’s a difficult time for companies, but battening down the hatches is the wrong approach, says Matthew Lynn.
2 Aug 2020

Most Popular

Can the recent rally in sterling continue?
Sponsored

Can the recent rally in sterling continue?

A "double top"  – a very recognisable pattern – is forming in in the US dollar. Dominic Frisby explains what it is, and what it could tell us about st…
3 Aug 2020
UK banks have had a shocking week – so it’s probably a good time to buy
UK stockmarkets

UK banks have had a shocking week – so it’s probably a good time to buy

Lloyds Bank reported a £676m loss this week. And, with all of the UK's high street banks having a terrible time of things, bank stocks are detested ri…
31 Jul 2020
Gold bugs' dreams are coming true – but we could still see a V-shaped recovery
Gold

Gold bugs' dreams are coming true – but we could still see a V-shaped recovery

John and Merryn talk about how it's perfectly reasonable to expect a V-shaped recovery and to continue holding gold as well. Plus, inflation, staycati…
30 Jul 2020