The figure chimes with the latest trading update from Forterra (FORT), an IC Tip of the Year (219.5p, 3 Jan 2019), which suggests that non-residential construction activity has slowed appreciably, even though “volumes into the new build housing market have remained broadly in line with plan”. Indeed, statistics from HM Revenue & Customs show that the provisional seasonally adjusted count of residential property transactions in September was 2.3 per cent higher year-on-year, and well up on the previous month.
Although residential transactions, or at least those within the new-build segment, continue to underpin overall activity, the brickmaker’s share price duly pulled back, along with those of industry rivals such as Ibstock (IBST), as it confirmed that full-year profits will come up short of the prior year.
Uncertainty reigns as lag indicators such as brick sale volumes and new housing starts provide scant reassurance for shareholders, but the ripple effects of changes to buy-to-let taxation and higher levels of stamp duty have yet to fully dissipate. Then there are the normal cyclical effects to take on board; you can offer all the incentives in the world, but market fundamentals will always trump short-term effects, even though the latter may be profound. To put it another way: you can no more make bricks without straw than you can lead a horse to water and make him drink it.
It’s a given that demographics lend long-term support to the residential housing market, but the bonanza for the construction supply chain triggered by buy-to-let schemes has been tapering off.
Then there's the issue of foreign buyers, many of whom, if anecdotal accounts are to be believed, routinely buy ‘off-plan’ as the UK’s robust title laws effectively provide an ersatz savings account. Consider that, earlier this year, Global Witness (a George Soros-backed NGO), claimed that 87,000 UK properties are anonymously owned by firms registered in tax havens, while research from the Centre for Housing Policy, at the University of York, shows that the proportion of new-build properties bought by overseas buyers was rising swiftly in the years leading to the Brexit vote, before hitting 17.9 per cent of 2016 sales, with a high proportion of the underlying properties located in Central London.
Political dithering in the post-referendum period has done little to dampen overseas demand, apart from the very top end of the London market, as the weak pound and stagnant property prices have sustained interest from abroad. Currency arbitrage has stoked interest, but it’s certainly conceivable that sterling could retrace rapidly if Boris Johnson’s withdrawal bill successfully makes its way through parliament, either pre- or post-election, acting as a disincentive for foreign buyers.
As for landlords, many of whom are servicing interest-only mortgages, they’ll be relieved that interest rate risk isn’t really an issue now, but that could change if political certainty is added back into the equation. Even if exchange rate appreciation and an increase in the base rate don’t play-out in the near-term, the ability of higher-rate taxpayers to offset their mortgage interest payments will be withdrawn in entirety next year.
Dampened demand in the new-build space would be unconscionable for a construction supply chain already hamstrung by a faltering civil engineering sector, but as we pointed out in a recent update for Grafton Group (GFTU), a ‘left-field’ issue could come into play eventually. The performance of Grafton’s operations in the Netherlands is being hampered by a ruling by the country’s highest administrative court that the Dutch building industry has been in breach of European laws linked to nitrogen emissions. This has resulted in the deferment of 18,000 construction projects, and a consequent reduction in activity within the country’s merchanting market. ABN Amro estimates that around 70,000 jobs may be imperilled if a solution is not found, though the Dutch government is looking at increased usage of electric machinery and vehicles, along with the introduction of modular construction techniques and nitrogen filters. Policymakers accept that the source of nitrogen deposition varies considerably from area to area, but it seems inconceivable that only the Dutch have breached European law in this area. Watch this space.
