With Brexit seemingly overhanging the UK housing market like the sword of Damocles, it’s easy to forget about the fundamentals. While some migrant workers and Russian oligarchs may indeed be heading for the housing exit, pent up demand among first-time and next-time buyers remains a powerful prop.
Brexit could also be working out as a twin edged sword, since it further urges the government to push initiatives to support the housing market further up the agenda. Ambitious house building targets are clearly designed to replenish the housing aspirations of disaffected younger voters.
With the Budget approaching, the Conservative think tank “Onward” floated the idea this week of capital gains tax relief for landlords selling their properties to sitting tenants. Onward believes its plan could help propel an additional one million people into home ownership by 20231.
What will be sought from the Budget at the very least will be confirmation the government’s housing investment plans – notably to build 300,000 homes per annum by the mid 2020s – are on track.
Previously announced initiatives, including the provision of support for smaller house builders and more training for construction workers, seemed like good ideas at the time, but are they being implemented and are they working?
Last week, the government announced it aims to further speed up the planning system and allow more flexibility to extend existing flats, shops and offices upwards in order to make a better use of space2.
You might think such accommodations – along with last year’s scrapping of stamp duty for first time buyers – would be great news for UK house builders. Yet they’ve languished this year, after a highly positive 2017, during which stocks were rebounding after the EU vote.
Even the announcement at the Conservative Party’s conference in Birmingham that council borrowing caps would be lifted in the hope of funding more building projects has failed to lift the gloom.
The trouble is investors appear to have been taking cues from the downbeat outlook statements of some builders and from London, where the market has been weakening. News that the nationwide take-up of buy-to-let mortgages has plunged since last year will not have helped.
House prices in “catch-up” regions like Yorkshire & Humberside and the East Midlands are still rising at an annual rate of around 5%, but could that sort of growth be coming to an end?3
However, thanks to a combination of strong past earnings but fears about the future, the dividend yields of some listed house builders have risen markedly this year4.
A classic victim of this turn in sentiment has been McCarthy and Stone, the retirement homes specialist. It depends on older homeowners, often living in more affluent areas, being able to sell-up and downsize.
In its trading update last month, which concluded profits could be down by as much as 30% this year, the company reiterated its concerns about economic uncertainty, a slower secondary market and softening pricing in the south of England5.
Meanwhile, Crest Nicholson’s exposure to higher priced areas has been a drag on profits, prompting the company to scale back its London operations6.
For others there’s the fear that a big government push on house building could actually achieve its goals, thereby depressing the prices builders eventually get.
As of now though, real evidence of a downturn for the sector is fairly patchy. Results last month from some of the nation’s largest house builders – Barratt Developments, Persimmon and Redrow – showed that, for them, overall trading remains buoyant7.
In a broader context, the fortunes of house builders, either as perceived or in reality, are inextricably linked to the outlook for the UK economy after March 2019. Given the current lack of visibility in this regard, an investment in house builders today requires some leap of faith.
You could take the view the long tail effects of Brexit will continue to undermine sentiment for a period of years, as it did after the global financial crisis, making house builders a neat “value trap” for investors.
Alternatively, you might think home buying intentions will be swayed only temporarily by Brexit uncertainty, paving the way for a favourable jobs market, pent-up demand and positive government policy initiatives to extend the upswing.
If Brexit is already in the price, house builders may indeed represent a compelling investment opportunity. One thing’s for sure though – as an indicator of market confidence in the UK economy, the performance of house builders remains one that’s hard to beat.
For investors seeking a broader exposure to the UK economy, Fidelity Select 50 list contains a number of ideas.
The Threadneedle UK Mid 250 Fund features a diverse portfolio of long-established names like Britvic, the textiles manufacturer Coats Group and the bricks-maker Ibstock along with younger firms such as Ascential (the digital media company that was once EMAP) and the operator of fast food outlets at railway stations and airports – SSP Group8.
The Fidelity Special Situations Fund, which seeks to invest in unloved UK businesses entering a period of positive change may be spoilt for choice. The Fund currently has large holdings in companies with both an international and domestic focus, including the building materials group CRH, Lloyds Banking Group and the educational publisher Pearson.
1 Onward, 08.10.18
2 Ministry of Housing, Communities & Local Government, 01.10.18
3 Nationwide, 02.10.18
4 Bloomberg, 09.10.18
5 McCarthy & Stone, 06.09.18
6 Crest Nicholson, 12.06.18
7 Reuters, 05.09.18
8 Colombia Threadneedle, 31.08.18
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.