For example, shares in Persimmon (PSN) collapsed by as much as 40 per cent, and trade below our buy recommendation (1,519p, 8 Jan 2015). Cutting losses here would also mean saying cheerio to an 8.3 per cent yield pencilled in for the next five years. Naturally, this promise could unwind if the UK economy slides into recession, but even the most pessimistic projections suggest that this is unlikely to be the case. Capital Economics nailed its colours to the mast with the suggestion that GDP growth in 2016 and 2017 will be 1.5 per cent, down from 2.2 per cent and 2.7 per cent respectively.
But this leaves the UK economy comfortably above recession levels. The same author suggests that rental growth will continue, albeit at a more modest pace. The big unknown is that rental growth is based on the premise that a shortage of prime office space - most notably in London - will provide an underlying pillar of support. This holds up well, as long as that demand remains in place.
So how do we measure value and how to quantify it? St Modwen Properties (SMP) took a pasting because of its exposure to housing in central London, more specifically its New Covent Garden Market site in Nine Elms. Even before the referendum the shares were spanked, even though the project accounts for just 13 per cent of the portfolio. Forget about forecasts because these are in the melting pot, but stripping the value of Nine Elms out completely left the shares trading at a 20 per cent discount to net asset value for the year to November 2015. That discount has now widened to nearly 40 per cent, and so the question is: are assets overvalued? The answer to that will unfold as time progresses, but without a collapse in asset values, these shares, as an indicative example, look cheap.
Addressing the broader market, a combination of lower capital values and sterling going through the shredder means that overseas investors are looking at the bargain of the year. Residential funds and asset management group LCP Property confirmed that it has received a string of enquiries in the first few hours following the referendum result. That's good news, and from an outsider's perspective makes admirable sense. But this investment plan only works if you're prepared to take the rough with the smooth. The rough is that the indices have fallen sharply. The smooth is that for the next two years at least, the UK's relationship with the EU is unlikely to change. In fact, disentangling completely could take up to a decade. And that's without stripping out the ruinous effects of gold plating imposed by the UK civil service on EU legislation.
Taking a look at housebuilders, the likes of Berkeley Group (BKG), with its exposure to London, have been hit badly. But how this translates to a similar style collapse in regional housebuilders is hard to fathom. Interest rates are now likely to stay low for longer, assuming that the Bank of England regards soft rates as a precedent over the potential inflationary effects of a weaker pound. Demand continues to outstrip supply, and major housebuilders are much more financially fit this time around, with four currently pushing out excess cash the way of shareholders. Following the post-referendum crash, shares in Berkeley Group now yield 8.8 per cent. Just this week, Redrow (RDW) explained in a trading update that profits for the year to June will be at the top end of expectations. Its private order book is up 50 per cent from a year earlier, while there are still queues at new sites resulting in strong reservations. Housebuilders will only struggle if house prices collapse and demand evaporates or if interest rates rise sharply. Neither seems likely. So the sharp fall in share values looks to be overdone, and with strong cash flow, little chance of a recession, and a huge supply/demand imbalance, now might be the time to reload.
