Have we seen the best of the house builders rally?
01:00, 07 juli 2014
· Av CMC Markets
When George Osborne announced the "help to buy" scheme in the budget of 2013, house building shares were already enjoying some good gains, but were still nowhere near the levels last seen prior to the crisis in 2007.
The new measures to boost the housing market were just the catalyst needed to push the market higher, and reignite demand in a market that had been struggling since the beginning of 2009.
Since the launch of "Help to Buy" there has been a lot of concern expressed about the sharp rise in house prices these schemes have helped fuel, but on the plus side it has helped boost a rise in construction and house building projects as UK house builders feel more comfortable releasing cash to fund new builds.
The boost of confidence in the UK economy has also helped boost demand for new homes particularly in London and the south east and helped fuel an increase in construction projects across the rest of the country.
The implementation of new stricter mortgage guidelines in April does appear to have prompted a broader sell-off in the house building sector since the peaks in March and shares across the board have been tracking lower since then, raising concerns that we could well have seen the best of the move higher.
There are grounds for optimism despite a cooling of house prices in recent weeks, with the house building federation in June announcing that residential permissions rose to 50,500 in Q1, up 12% on the same period last year.
This continued growth in demand is likely to continue to underpin the sector and Persimmon in particular, but there still remain concerns about a lack of supply of available land, so while demand remains solid, supply could well limit future growth.
Last week's Q2 trading statement did point to a positive outlook, with revenues up 33% but looking forward the firm came across as slightly conservative, despite acquiring plenty of new land plots.
Persimmon shares had been one of the worst performers in the new post 2007 world, but have slowly and surely regained a lot of that lost ground, and their latest results last week show that the company is still reaping the benefits of the recovery in the UK economy.
Having committed to pay a dividend of 6% over the course of the next 12 months and with a fairly modest forward earnings target, there does appear to be scope for plenty of upside.
The “fly in the ointment” remains the level of house prices, and any steps that might be taken to limit mortgage availability, and by definition the ability of the company to shift its housing stock.
Across the housing sector it’s been a pretty similar performance, as shown below, with Taylor Wimpey and Bovis Homes reporting this week.
Taylor Wimpey has been by far the better performer over the last 12 months, up around 30% and it shows in the context of the dividend yield, currently 0.6% and a forecast yield of 2.1%, which would seem to suggest that the best of the gains could well be behind it.
Having delivered a strong Q1, the company has already warned that government targets to deliver the homes necessary look challenging unless the planning system undergoes fundamental reform, particularly in London where recent price rises have been described as “not healthy”.
Having updated its targets earlier this year this week’s Q2 trading statement will give the first indication as to the progress the company is making on its pledges to deliver £50m to investors this month, and £200m by July next year.
Bovis Homes is another house builder that has reaped the benefits of the recovery in the housing market, but its shares have struggled to match the gains by its two larger peers over the past 12 months, gaining less than 10%.
Earlier this year the company announced that it had built 80% more homes in Q1 than in the same
period last year. This week’s Q2 sales update will be a good benchmark as to whether the company has continued to kick on from its performance in Q1.
Looking at the share price performance of the house builders over the past 12 months, and the recent slide since March there does appear to be some concern that we could be set for a pause in rising prices.
It would appear that while the short term outlook for housing continues to remain positive, all the talk about elevated house prices and the uncertainty over the timing of a possible interest rate rise, as well as recent measures to limit mortgage availability, has made investors more cautious about piling into a sector that is notoriously sensitive to cyclical cross winds.
Having said that, on a long term view all three companies trade on a fairly low forward earnings estimate, and with housing demand set to remain strong, the prognosis is likely to be a good one for investors prepared to be patient.
The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.