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Outperforming house builders need to impress further

Outperforming house builders need to impress further

At the beginning of 2015 there were a number of concerns surrounding the housebuilding sector with respect to the outcome of this year’s General election in light of concerns that the eventual outcome was expected to be anything but conclusive. As it is over the past two years the sector has been one of the best performing sectors in the FTSE350, with Redrow and Barratt Developments posting gains of around 100%, while Berkeley Group’s shares have risen just over 50%. At the beginning of the year we did see some evidence that London house prices were starting to show signs of weakness, which in some respects wasn’t too much of a bad thing given how quickly house prices were threateningly to spiral higher in 2014, amidst talk of a bubble. This also raised some concerns that the sector was becoming rather expensive, given the gains seen since help to buy was launched in 2013. The Mortgage Market Review of last year and recent curbs by the Bank of England on Loan to Income caps appear to have done their job with respect to making sure that lenders are more sensible about how many new mortgages they make available, though as we’ve progressed through 2015 mortgage approvals are once again rising back to levels last seen in early 2014, though some of this could be down to homeowners re-mortgaging to lock in low rates. The recent changes in stamp duty thresholds announced by the Chancellor last year have also helped slow down house price growth in London, while at the same time helping the lower end of the market, due to the way the changes adversely affect properties over the £2m mark. On the other hand it has also helped boost the cheaper end of the house price chain due to the cost savings made as a result of the removal of the slab based structure of the duty. It is expected that these changes will be reflected in half year results for Berkeley Group and preliminary full year results for Barratt Developments and Redrow when they are released this week. Berkeley Group kicks things off tomorrow, fresh off the back of its promotion to the FTSE100 and given it is more exposed to the higher end London market we could see some scope for disappointment, as a result of the recent changes in stamp duty. The shares are up over 30% since the beginning of the year but have underperformed relative to the rest of the sector in the last two years. This is likely to raise questions with respect to the recent large pay awards to the management team, particularly at a time when the government is heavily subsidising the UK housing market with cheap financing and incentives. Expectations are for a slowdown in revenue and profits growth in comparison to 2014 when the company saw sales of £2.1bn and pre-tax profits of £540m. Estimates for this year ending March 2016 are currently set at £1.85bn and pre-tax profits of £460m. These lower estimates do seem to contrast to the general direction of travel in the rest of the sector with respect to increasing sales and profits growth. It also raises the question as to why management deserve to be rewarded so handsomely when unlike the rest of the sector their forward earnings estimates are below the previous year’s numbers. Redrow is also announcing preliminary full year results for its year end and with the shares up over 100% in two years, and over 60% this year alone, expectations are for another record number, after an upbeat trading update in February. Investors are anticipating an increase in revenues of over 30% and a 50% increase in profits. Revenue is expected to come in at £1.15bn and pre-tax profits of £197m. Earlier this year we saw the return of Barratt Developments to the FTSE100 and over the last 12 months the company has expanded its work force by nearly 40%. January’s announcement of another 600 new jobs across the North East suggests that the company was optimistic about its prospects. Given that it is also more exposed to the lower end of the housing market it is likely to feel the benefits of the recent stamp duty changes more than most, particularly if interest rates remain at their current low levels then it stands to reason that demand for houses is likely to remain good. With the shares also up 100% in the last two years it is also up just over 30% this year alone, with expectations high that we will see a continued upswing in revenues and profits. Revenue is expected to increase to £3.65bn from £3.1bn while pre-tax profits are expected to rise to £562m from £390m, an increase of just over 40%. 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.

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