Managers back UK housebuilders despite threat of recession in UK

Managers believe sensible business plans will support housebuilders and offer greater scope to grow profits than government’s stimulus package.

Managers are backing economically sensitive UK housebuilders despite an ‘underwhelming’ government stimulus package for the sector and the threat of impending recession.

The government is set to introduce mortgage guarantees for up to 100,000 new homes, and will create a £400m fund to kickstart stalled developments
and release land for residential use.

The aim is to breathe new life into a stagnant market which has slowed in line with economic growth, hampered by banks’ refusal to lend on reasonable terms.

Share price falls

Housebuilders, which make up an estimated 20% of the economy, saw their share prices drop on the news. Persimmon, Barratt, Taylor Wimpey, Bellway, Bovis and Berkeley all saw their stock lose close to 2% after the Prime Minister unveiled the stimulus measures.

By its nature, the sector is closely tied in to the fortunes of the UK consumer, and it suffered during late 2008 and early 2009, when Barratt and Taylor Wimpey were trading on 90% discounts to their net asset value.

However, moving into this latest period of sub-par economic growth, restricted lending, and constrained consumer spending, housebuilders are holding up well. 

Although the government’s cash injection has been dismissed by some investors as too small scale to have much of an impact over the long term, UK managers continue to favour the sector.

They say cost-cutting measures made during the credit crisis, plus housebuilders’ sensible management of their businesses today, mean they remain an interesting area of the market.

Cash-generative businesses

Schroders’ head of UK equities Richard Buxton favours the sector for its ability to generate cash and cope in an environment of falling sales. 

“The stimulus package is essentially small beer. The issue is, in an environment of bank deleveraging, it is hard for people to get mortgages.

“The government is trying to help first-time buyers, but the impact will be relatively modest. Companies are managing for margins not volumes because they accept the volumes are not there right now. I still think they are good value.”

Upside

Taylor Wimpey makes up 2.5% of his £2.5bn portfolio, and Buxton said it has rallied off its lows and has been able to perform in line with market forecasts.
It is also at the greatest discount to landbank NAV.

“Taylor Wimpey was the most distressed and we felt comfortable with the balance sheet and thought it had the greatest upside,” he said.

“Housebuilders are running their businesses sensibly for today’s market volumes. Volumes are low but they are bumping along at a steady rate. Companies are not under financial pressure, they could carry on like this for many years. They are also valued on heavy discounts to NAV of 35%-40% on average.”

Profit margins

Old Mutual Asset Managers’ Richard Watts, running the OMAM UK Select Mid Cap fund, has been adding to Barratt at 1.7% of his £829m portfolio, and holds Bellway at 2.2%.

He has previously held Taylor Wimpey, but sold it last year.