The UK Housebuilding Sector
Is it crumbling or is it building?
Are prices collapsing across the country?
Will Brexit – whether No Deal or With A Deal – bring about the financial Armageddon that all of the Remainers have been forecasting?
Unfortunately, I do not have a crystal ball to answer these questions.
However, I remain convinced that there is a massive demand for houses in the UK and that demand is not currently being satisfied.
Annually 340,000 new homes required but only 165,000 built
A research survey by the Heriott-Watt University stated that in England alone there was a backlog of some 3.9m homes being required. Their conclusion was that the country needed to build a total of 340,000 new homes year for the next 13 years.
Yet the UK Government has only set a target of 300,000 homes a year. And to date that is far away from being met.
The number of new builds last year was around 165,000, of which 28,000 were built by housing associations and 2,600 by local authorities, the balance of the total is made up by private enterprises, the majority of which are quoted companies.
Plans to scrap ‘Help to Buy’ and the ‘Buyers Tax’
This woeful lack would surely show that the unsatisfied demand almost guaranteed the housebuilding sector years of work and profit ahead.
But Government has been pulling in its financial reins across the board. Although they require a 45% uplift annually in new homes, they are not really helping to make up that difference.
Yes, they started the very important ‘Help To Buy’ scheme, which has put hundreds of young buyers into the marketplace, but on the other hand they still keep on a punitive ‘Buyers Tax’ for anyone in the housing sector.
In the recent political hustings it has been mentioned that perhaps the ‘Buyers Tax’ will be abolished, instead putting it over on to the private sellers of housing properties. That would certainly be a great help to more young couples needing to get on the housing ladder, easing their cash requirement for getting their own roof over their heads.
The ‘Help to Buy’ scheme has proved to be a mega-helper for the UK’s housebuilders over the last few years. Unfortunately, because big profits have been made, it has also helped to push up land sale values, which in turn pushes new build prices higher.
The average asking price, courtesy of Rightmove, is circa £308,692.
Big profits push leads to lower standards
In the developers push for greater profits a number of them have apparently eased back their standards of construction and finish.
Persimmon (LON:PSN), Britain’s most profitable housebuilder, has been regularly featured in the media for building faults and regulation violations. Considering that it builds 1 in 7 of all UK houses that is not an impressive fact.
That, actually, is really very scaring, because if all the developers see that the big profits are made by poor quality control then it could well become the norm.
Persimmon is said to make some £66,000 profit on every house that it sells.
Since April of last year James Brokenshire has been the Secretary of State for Housing, Communities and Local Government. He is apparently none too happy with companies like Persimmon. He is quoted as saying that
“For most people, buying a home is one of the biggest financial and emotional investments of their lives. And for that to go from being a cherished dream to becoming a nightmare of snagging problems months after moving in and with punitive costs is simply unacceptable.”
Brokenshire later went on to warn the housebuilders that, if they want to continue to benefit from the ‘Help to Buy’ scheme, then it was very important to end the unacceptable punitive costs and the nightmare snagging problems in new homes.
Where is all this new-build land coming from
Although it is correctly being suggested that developers are hoarding their land stocks, due to higher values being driven for and achieved, there is still a massive amount of land upon which new homes can be constructed.
In the UK more than half of the land area is ‘farmland’, such as fields and orchards.
Over a third of UK land could be called ‘natural’ or ‘semi-natural’, covering moors, heathland and natural grassland.
Another 2.5% is classed as ‘green urban’ including parks, gardens, golf courses, sports pitches and similar.
It is estimated that just 6% of UK land is built on, taking in roads, buildings, airports, quarries and the like.
Brownfield and contaminated land
I have recently featured several quoted companies that are specialists in identifying ‘brownfield’ land that had previous industrial or mineral uses, upon which new planning applications can now be made for residential use.
Old coalfields, military bases or even contaminated property like old petrol stations, can all be treated and later regenerated as useful landbanks for future housing developments.
Easing of Planning Permissions
Drive around Britain’s road system, especially on the motorways, and it becomes very apparent just how much new build is underway, especially on former farmland.
The gaining of planning permissions has got noticeably easier over the last few years, leading to some quite large urbanisation.
However, as yet, central Government has done very little about imposing a correct balance of infrastructure space, such as areas for doctor’s surgeries, chemists, post offices, schools, shopping and other amenities, and making it a required planning condition for new build quotas.
Local authorities have yet to realise that they could benefit significantly from the development of such parallel infrastructure.
Government and the economic impact of new build
From an economic point of view, hopefully the Government realises that there is an almost instant ‘pick-up’ for every 100,000 new homes that are developed, in so much that the Gross Domestic Product of the country is boosted by another 1% and it also supports over 150,000 jobs.
Unfortunately, the impact of Brexit has been pushed by Chancellor Philip Hammond and his Project Fear team, including the Bank of England Governor Mark Carney – in saying that in a disorderly Brexit house prices could fall by as much as 30%.
I feel that really is a total load of tosh and the Remainers will soon be proved wrong in that assumption.
Other players in the sector
As was seen in the new build figures previously stated – not only are there publicly quoted companies operating in the UK housing sector – others include private development companies, housing associations and local authorities.
Other corporates are now also coming to play.
Ikea and construction firm Skanska, who have built 11,000 homes across Scandanavia, have recently tied up a deal with Worthing Council to construct 500 of their Bo-Klok affordable factory-built homes.
Japan’s biggest housebuilder Sekisui has moved into the market in a £90m investment boost. It has taken a 35% stake in Urban Splash, a modular house business, which is in a partnership with Homes England.
The Croydon council has established Brick by Brick with the aim of building 2,000 new homes on multiple sites across the borough.
Hugg Homes, a new south-east based modular housing concept, has completed some 22 stylish and efficient properties with Southampton City Council. Those affordable homes were all let within 6 weeks of completion. Hugg Homes is a wholly owned subsidiary of the London quoted Inland Homes (LON:INL).
The Build to Rent sector is fast-growing
Elsewhere the ‘Build to Rent’ sector is showing continued strength, with over 140,000 units completed, under construction or in planning by the end of March this year. Schemes cover the country, with Leeds, Liverpool, Manchester and Birmingham leading the way.
BTR homes are developed to generate rental income, as opposed to capital profit. There is a strong demand for rental space and a growing number of players are involved or are entering this market.
Both British Land (LON: BL), with projects for 4,000 homes, and Grainger (LON: GRI), in a TfL 3,000 homes scheme, are showing an active interest in the BTR market, whilst Legal & General has actually launched its own UK BTR Fund and is already working a £500m development of some 1,000 new homes.
Telford Homes (LON:TEF) is very committed to the BTR sector, it already has partnered with Invesco Real Estate and M&G Real Estate on some 400 properties. However, they may well develop an even deeper interest in the market following their £267m cash bid from the US giant CBRE.
Other large players coming into the BTR fold are PFP Capital, who are raising £550m for a new fund, and Greystar, which is planning to seek £750m for their first BTR fund.
UK House Builders – data and comment
Barratt Developments (LON:BDEV)
Mkt Cap: £6.42bn
Sales: 2019 £4.85bn 2020 £4.91bn
Net Income: 2019 £721m 2020 £723m
PE: 2019 8.9x 2020 9.1x
Yield: 2019 7.20% 2020 7.38%
Comment: Not expensive relative to its peers. After the recent Trading Update Morgan Stanley are cautious but recommend being ‘overweight’ with an increased Target Price of 675p, up from 625p.
Mkt Cap: £3.51bn
Sales: 2019 £3.11bn 2020 £3.21bn
Net Income: 2019 £537m 2020 £550m
PE: 2019 6.5x 2020 6.5x
Yield: 2019 5.17% 2020 5.57%
Comment: The Company’s forward order book rose to 6,312 homes, with 68% of plots already contracted. Canaccord has a Target Price of £34.50. However, Shore Capital has recently downgraded the shares to a Hold after having turned bearish on the UK house building sector.
Berkeley Group (LON:BKG)
Mkt Cap: £4.86bn
Sales: 2020 £2.19bn 2021 £2.32bn
Net Income: 2020 £433m 2021 £471m
PE: 2020 11.6x 2021 10.9x
Yield: 2020 5.41% 2021 5.42%
Comment: Despite its London market showing sluggish signs, the Company’s strong balance sheet and its ability to deliver strong results in a ‘soggy’ sales market encouraged Berenberg to rate the shares as a Buy, with a Target Price of £38.50.
Bovis Homes Group (LON:BVS)
Mkt Cap: £1.42bn
Sales: 2019 £1.09bn 2020 £1.13bn
Net Income: 2019 £153m 2020 £168m
PE: 2019 9.7x 2020 8.8x
Yield: 2019 9.69% 2020 9.60%
Comment: The recent Trading Update, was ‘solid’ and showing that the Group’s turnaround strategy is still on track. Canaccord rate the shares as a Buy with a Target Price of £11.40.
Countryside Properties (LON:CSP)
Mkt Cap: £1.29bn
Sales: 2019 £1.40bn 2020 £1.56bn
Net Income: 2019 £176m 2020 £198m
PE: 2019 7.4x 2020 6.6x
Yield: 2019 5.16% 2020 6.45%
Comment: Berenberg continues to rate the shares as a Buy with a Target Price of 380p, Numis are going for 407p, whilst Jefferies are saying Buy with an even more bullish Target of 422p.
Crest Nicholson Holdings (LON:CRST)
Mkt Cap: £909m
Sales: 2019 £1.14bn 2020 £1.12bn
Net Income: 2019 £122m 2020 £125m
PE: 2019 7.5x 2020 7.4x
Yield: 2019 9.32% 2020 9.32%
Comment: Higher costs hit the interim profits, impacted by flat pricing and continued build cost inflation. Rating the stock as a Buy, Liberum are looking for 405p as their Target Price, they see fruits of its revised strategy showing through.
Galliford Try (LON:GFRD)
Mkt Cap: £697m
Sales: 2019 £2.76bn 2020 £2.71bn
Net Income: 2019 £126m 2020 £128m
PE: 2019 6.5x 2020 6.2x
Yield: 2019 10.40% 2020 10.50%
Comment: The Group, which recently rejected a £950m bid from Bovis, sees its annual profits for the June 2019 year end in line with market expectations. Canaccord have a Hold on the stock, with a Target Price of 860p.
MJ Gleeson (LON:GLE)
Mkt Cap: £435m
Sales: 2019 £230m 2020 £254m
Net Income: 2019 £33.2m 2020 £36.8m
PE: 2019 13.1x 2020 11.8x
Yield: 2019 4.29% 2020 4.49%
Comment: This Company’s home division is comfortably on track to achieve its volume target of doubling new homes to 2,000 a year by 2022. It sold 1,529 homes during the year, which was 25% up on the previous year. Liberum have a Buy rating with a Target Price of 900p.
Inland Homes (LON:INL)
Mkt Cap: £138m
Sales: 2019 £185m 2020 £215m
Net Income: 2019 £17.6m 2020 £19.4m
PE: 2019 8.7x 2020 7.7x
Yield: 2019 3.94% 2020 4.60%
Comment: The recently announced planning permission for an ‘urban village’ on the former Tesco site at Cheshunt Lakeside, will see the development of 1,725 new homes and 19,000 sqm of commercial space. That really is mega news for Inland, but yet to be recognised by the market. Its Directors have been buying at around this current price. I know this Company and its Directors and rate them very highly. I have set a 110p Target Price.
Mkt Cap: £6.26bn
Sales: 2019 £3.64bn 2020 £3.72bn
Net Income: 2019 £833m 2020 £839m
PE: 2019 7.3x 2020 7.2x
Yield: 2019 11.9% 2020 11.9%
Comment: Despite its ongoing and appalling media coverage both UBS and Peel Hunt have been impressed by the Company’s shift towards improved quality, despite its revenue slip back. Peel Hunt rate the stock as a Hold with a Target Price of £20.25, whilst UBS are much more bullish with a Buy rating and a Target Price of £26.50.
Mkt Cap: £1.91bn
Sales: 2019 £2.05bn 2020 £2.11bn
Net Income: 2019 £322m 2020 £332m
PE: 2019 6.0x 2020 5.8x
Yield: 2019 9.4% 2020 7.1%
Comment: Shore Capital Markets has turned cautious and has downgraded the shares to a Hold. However, I do think that it is still inexpensive against its peers. An average from 14 analysts following the Company suggest 641p is the Target Price.
Springfield Properties (LON:SPR)
Mkt Cap: £108m
Sales: 2019 £185m 2020 £208m
Net Income: 2019 £12.9m 2020 £14.8m
PE: 2019 8.4x 2020 7.3x
Yield: 2019 4.1% 2020 4.9%
Comment: Strong growth across its housing division in the first half year carried over into its second half. Its recent acquisition of Dawn Homes has performed well. For the full year to end May 2019 improved gross margins and sales have combined with tight cost control to pump through some significant growth over the previous year. The finals are due on 17th September. I rate these shares highly. However, across 3 analysts following the Company their average Target Price is only 125p.
Taylor Wimpey (LON:TW)
Mkt Cap: £5.38bn
Sales: 2019 £4.16bn 2020 £4.28bn
Net Income: 2019 £670m 2020 £694m
PE: 2019 8.0x 2020 7.8x
Yield: 2019 10.9% 2020 11.2%
Comment: The Company considers that its market remains stable despite political uncertainty. Goldman Sachs has recently upgraded its rating on the Company from Neutral to Buy. HSBC rates the shares as a Buy with a Target Price of 230p, whilst Berenberg goes for 200p.
Telford Homes (LON:TEF)
Mkt Cap: £266m
Sales: 2019 £375m 2020 £476m
Net Income: 2019 £20.2m 2020 £24.3m
PE: 2019 13.3x 2020 10.9x
Yield: 2019 4.8% 2020 4.8%
Comment: The CBRE cash bid may be too low for some holders. And although CBRE think they may have it in the bag, they have left the door open to bid again if a higher bid is made by another party.