If progress towards addressing the housing shortage last year was at best modest, it was certainly not for want of trying. There were a host of new initiatives to address the problem, but putting these into action will take time.
Perhaps the most ambitious of all the plans put forward is a government pledge to build an additional 400,000 new homes over the next four years. This needs to be put into context; last year, housing completions in the UK reached around 145,000, so builders will have to increase output by two-thirds to meet this target, a level of expansion that is clearly unachievable. First, the plan overlooks one of the obvious challenges - a lack of skilled labour. This will be familiar to anyone that has tried to contract reliable builders for house improvement projects. More than 300,000 plumbers, bricklayers, electricians and carpenters left the industry during the downturn, and while quarterly housing completions have recovered from a low of 16,420 in the fourth quarter of 2008 to around 35,000, that's still way below the 69,520 quarterly peak touched in the second quarter of 1978.
The record high is unlikely to be reached again because council house construction has shrunk to nothing, while housing associations have yet to make a meaningful impact. One of the key points in November's Autumn Statement was the introduction of a discount scheme for first-time buyers. But putting more people onto the housing ladder will simply fuel demand even further. For those unable or unwilling to buy, the rental sector received a further blow in the wake of plans to scale back interest rate relief on buy-to-let mortgages. From April, buy-to-let properties and second homes will be hit with an extra 3 per cent stamp duty. Many young people can afford to pay the rent on properties that they cannot afford to buy, and landlords have warned that the extra costs will be passed on.
For the housebuilders, having suffered due to pre-election jitters and subsequent misplaced concerns about a rise in interest rates, there was also concern that the accelerated construction rate would prompt cost inflation to rise, mainly as a result of skilled labour shortages but also as a result of raw material shortages. None of these have derailed the nine companies in the FTSE 350 index, with shares in the top performer Redrow (RDW) up 53 per cent on the year, while laggard Bovis (BVS) still managed a 10 per cent increase. As an added bonus, build cost inflation, pencilled in at the start of the year at around 5 per cent, ended the year just below that, and initial forecasts suggest that there will be a further fall of 3-4 per cent in the coming year.
The bullish appraisal that we gave a year ago remains little changed. Interest rates are not going up soon; cost inflation has moderated as raw material suppliers increase output, while imported workers and apprentice schemes start to address the shortage of skilled labour. Land price inflation remains benign as companies maintain a disciplined approach to land purchases. Pressure from smaller builders could change this, though, following a pledge to make financing more easily obtainable. However, the major players are sitting on impressive land banks; a necessary consequence of the chronically under-resourced local authority planning departments that struggle to process applications at anything like the rate needed to implement the badly needed acceleration in construction.
In January, Countryside Properties announced its intention to become the latest housebuilder to float on the London Stock Exchange, with plans to raise £114m. This will be used to reduce debt by around £64m, with the rest used to accelerate existing developments. The free float is expected to be a minimum of 25 per cent: clearly, Countryside's owners want to keep a fair amount of exposure to this growing market.
| NAME | Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change (%) | Last IC view: |
|---|---|---|---|---|---|---|
| BARRATT DEVELOPMENTS | 579 | 5,803 | 12.7 | 2.6 | 33.6 | Hold, 640p 9 Sep 2015 |
| BELLWAY | 2,653 | 3,251 | 11.5 | 2.9 | 51.3 | Buy, 2,705p 15 Dec 2015 |
| BERKELEY GROUP | 3,572 | 4,881 | 13.1 | 5.3 | 52.4 | Buy, 3,612p 4 Dec 2015 |
| BOVIS HOMES GROUP | 886 | 1,191 | 10.8 | 4.1 | 15.0 | Hold, 1,075p 26 Aug 2015 |
| CREST NICHOLSON HOLDINGS | 516 | 1,299 | 11.3 | 3.2 | 47.7 | Buy, 546p 26 Jan 2016 |
| GALLIFORD TRY | 1,423 | 1,171 | 12.2 | 4.8 | 14.2 | Buy, 1785p, 16 Sep 2015 |
| PERSIMMON | 1,957 | 6,002 | 13.2 | 0.0 | 39.0 | Sell, 2,003p, 26 Aug 2015 |
| REDROW | 425 | 1,572 | 9.6 | 1.4 | 61.8 | Buy, 494p, 9 Sep 2015 |
| TAYLOR WIMPEY | 185 | 6,022 | 16.5 | 1.0 | 44.4 | Hold, 191p 26 August 2015 |
Favourites
Most housebuilders trade on heady multiples to net tangible assets, but given the supply and demand imbalance and benign backdrop, it is hard to set too much store by this established metric. The worst performer, Bovis, has the most attractive price to net asset ratio of 1.4, while Persimmon (PSN) at 2.7 is one of the top performers, with the added attraction of a bumper dividend. However, looking at the return on capital employed shows Bovis languishing at 14 per cent against 24 per cent for Persimmon, and 28 per cent for our other preferred pick Berkeley Group (BKG), which also pays a dividend yield of nearly 6 per cent.
Outsider
Given that all the housebuilders are enjoying a favourable trading environment, it is hard to pick an outsider. It would be easy to choose Redrow because the dividend yield is the lowest at 2.5 per cent, but the shares rose by more than a half last year, and analysts at Peel Hunt have pencilled in a 25 per cent increase for the coming year.
