Fund Team: Real Estate & Construction Update

Thomas Hogg, Real Estate & Construction Sector Leader 2015-16

The year ended with the announcement that UK house building reached its highest level since the financial crisis as The National House Building Council registered 156,140 new homes in 2015. Although this is still short of the government’s target of 200,000 new homes, it is a rise of 7% on the previous year and may indicate that the recovery from the housing crisis may be turning a corner. However, the 2015 General Election created uncertainty in the sector as the prospect of a change of government led many to be cautious about its future. Nevertheless, with a return to the Conservative government, the sector has responded well with an 18% rise in house building since May.

Since the beginning of the previous parliament stocks of house builders have risen 270% and many look to continue to have a prosperous future in the current economy. Rises of 46% from Taylor Wimpey (TW.L), 32% from Barrett Developments (BDEV.L) and 24% from Persimmon (PSN.L) have placed them as some of the top performers on FTSE 1OO in 2015. In spite of this rising construction costs are beginning to insert pressure on operating margins. As a result the sector analysts have been looking to seek out value, which we believe can still be found in some UK house builders such as The Berkeley Group (BKG.L), Bellway (BWY.L) and Taylor Wimpy (TW.L). Analysts are also watching the emergent online estate agent PurpleBricks (PURP.L). The group is currently in the process of an aggressive recruitment drive and is looking to gain a hold in the £4bn estate agent market. This potential disrupter to the market and the traditional estate agent business model has seen year on year revenues rise 777%, yet having recently published a loss as a result heavy capital expenditure.

Looking forward, 2016 looks to continue the sustained growth from the previous year. Construction has slowed in the capital with the exception of Prime Central but the government’s incentive ‘London Help to Buy’ is seeking to be as successful as its namesake nationwide policy. The possibility of a Bank of England interest rate hike may knock on to mortgages, however this is estimated to be slight with lenders recording strong demand with approvals in 2015 being 19% higher than the previous year.

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