In the days after the EU referendum, housebuilding shares slumped. Over two days, housebuilders lost up to 40 per cent of their stock market value. About £8 billion was wiped off the biggest hitters: Taylor Wimpey, Persimmon, Barratt Developments and Berkeley Group.
The markets were worried that the uncertainty caused by such a vote would kill off demand for new homes. How wrong they were. The following year Barratt, the country’s biggest housebuilder, reported that in 2016 it sold the most homes since 2008. Profits rose 12 per cent to £765 million. There was a 39 per cent increase in the final dividend. Berkeley said it was on track to deliver at least £3 billion of pre-tax profit in the five years to 2021 and return more than £2.2 billion of capital to shareholders. Redrow raised its dividend by 70 per cent. Share prices shot up again.
That was in September last year. Now investors are getting jittery again. Barratt, Persimmon and Taylor Wimpey have all reported solid trading updates in the past week, yet their share prices have dropped. Barratt delivered an update in line with expectations, with an order book up 3.8 per cent. Yet its shares closed down 17p at 617p. Taylor Wimpey delivered a 5 per cent increase in completions and confirmed it is delivering £500 million to shareholders this year. The shares? Down nearly 3¾p to 196½p. Both developers were among the biggest fallers in the FTSE 100 yesterday.
So what’s going on? Like all market movements, different folks are offering different explanations. But some analysts believe that the bulls on the housing market are deciding that perhaps they have got things wrong. A repeated refrain among chief executives of housebuilders over the past week has been that they expect only “modest” growth in volumes over the next few years and house price growth of little more than 2 to 3 per cent. Peter Redfern, chief executive of Taylor Wimpey, said the days are gone of always updating shareholders with the announcement that the company expects growth to be 5 percentage points higher than expected.
Robin Hardy, an analyst at Shore Capital, is advising investors to sell shares in the likes of Barratt and other big housebuilders.
“The issue is selling prices,” he said. “Housebuilders are riding a cycle and the cycle is about to turn and bite them. If prices nationwide are flat, then no matter how much demand there is for new-build, a house is a house and a lender won’t lend you premium pricing for new build.”
House price growth in the UK has more than halved over the past year. Halifax, Britain’s biggest mortgage lender, said that prices rose by 2.7 per cent in the year to the end of December, compared with 6.5 per cent in 2016.
Reductions in national house prices can rock the profit margins of housebuilders very rapidly. If prices fall 5 per cent, margins fall 5 per cent and if your margins are 20 per cent, profits fall 25 per cent. “These things are beholden to the market and when prices go down, it’s going to drag you down,” Mr Hardy said.
Yet others are not so sure. Prices are merely slowing, not falling, while the housebuilders also have the support of the government’s Help to Buy scheme, which makes them more immune to any sharp decline in market activity.
Help to Buy allows buyers to purchase a home with a 5 per cent deposit as long as it is new build and costs less than £600,000. It supports as much as 50 per cent of sales for the likes of Persimmon and Taylor Wimpey and is not due to finish until 2021.
Anthony Colding, an analyst at Jefferies, said: “It is difficult to see what may derail this particular train.” Time will tell if he is right.
ADVICE Sell
WHY Housebuilders are looking overvalued at a time when national house price growth seems to be slowing and the market is stagnating.
Jupiter Fund Management
Jupiter Fund Management has broken through the £50 billion mark of assets under management, thanks to strong markets and currency movements as well as inflows of clients’ cash.
It is a nice milestone but the performance was rather muted in the final three months of last year — large outflows in some areas dragged down the overall number. That spurred selling of Jupiter’s shares, which are highly rated among asset managers and small disappointments are not taken well. Jupiter has had a busy year diversifying from the UK and widening its client base. A global emerging markets corporate bond fund was launched in March, followed in May by an emerging and frontier income trust and in September a global emerging markets short duration bond fund. In October it launched a global levered absolute return fund.
In addition it has gained traction in new markets, picking up clients in Thailand and Latin America in the three months to December 31.
In total, assets rose 3.7 per cent in the period. Assets under management at the end of last month were £50.2 billion, up from £48.4 billion on September 30. Market and currency gains added £1.2 billion and net inflows a further £570 million.
Jupiter, which was spun out of Commerzbank in 2007, has some big-name fund managers who deliver solid performances and it has been the subject of speculation that it will be the sector’s next takeover target.
Its main challenge is where to find growth to keep its highly rated share price buoyant. Asset managers trade at about 13 times future earnings, while Jupiter is priced at about 16 or 17 times.
There could be bumps along the road. Jupiter may be casting its net wider than the UK but it has a large exposure to its home market, where regulators are cracking down on asset managers’ traditionally fat fees and high margins.
Opinion is divided over whether absolute return funds, which promise returns in all market conditions, are worth their high charges. If opinion turns against them it would be a problem for Jupiter and indeed others that have seen them as a valuable new source of growth.
ADVICE Avoid
WHY Growth prospects already reflected in the shares.
