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.
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.
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).
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.