After effectively freezing the UK housing market when lockdown was implemented, the government has given the go-ahead for property viewings, moves and in-person valuations in England. However, few expect a quick bounce-back in activity, with safe working protocols adding complexity and cost to proceedings and the extent of the longer-term economic downturn still unclear. Here are some of the key questions investors should be asking about the future of the property market.
Are we likely to see a downturn in house prices?
The consensus within the property industry is that UK house prices will fall this year, but forecasts vary significantly over how large that decline will be. At the more pessimistic end, the Centre for Economic and Business research forecasts a 13 per cent correction, while Knight Frank puts the average price reduction at just 3 per cent. Both purchase and sales instructions fell in sync in April, according to research from the Royal Institution of Chartered Surveyors, which could mean there is an element of pent-up demand in the market that could provide a fillip to transactions in the coming months. However, rising unemployment and a potential reduction in mortgage lending at higher loan-to-value ratios present a threat to demand and transaction prices.
Should buy-to-let landlords brace for a squeeze on their income?
In March, the government extended the three-month mortgage repayment holidays offered to residential borrowers to buy-to-let landlords to help mitigate a potential loss of income from renters experiencing financial hardship. That has since been extended by a further three months but when that period ends, repayments will be resumed and the rolled-up interest added to the outstanding mortgage – but landlords are likely to continue to face a cash crunch. Unemployment benefit data from the Office for National Statistics, which showed a record monthly rise in claimants of 69 per cent in April, has given an early indication of the increased financial strain facing the population. Yet many suspect that figure will rise once the government’s furlough scheme ends in its current form at the end of July. Landlords have been encouraged to take a compassionate approach and negotiate repayment plans with tenants.
Are housebuilders in a better position than they were entering the 2008 financial crisis?
In short, yes. Balance sheets are in a much healthier shape than they were in 2007, with most UK-listed housebuilders posting significant net cash balances in March compared with net debt positions as they entered the last financial crisis. Housebuilders have also been taking a more measured approach to shelling out on new land and some, including Crest Nicholson (CRTS) and Barratt Developments (BDEV), have been actively attempting to reduce the duration of their land banks. In the event there is a severe downturn in house prices, that makes them less vulnerable to hefty write-downs in the value of their land banks. Lenders are also better capitalised, which gives them greater ability to continue writing new mortgages, but prudently assessing the value of assets has also become harder. The level of available mortgage products at the start of May was around half what it was two months earlier, but lenders have started to relaunch products with higher loan-to-value ratios.
When are we likely to see a return to dividends?
Although most housebuilders are in a net cash position, the extent to which companies can rebuild cash flows and resume dividends will depend on how quickly transactions pick up and the extent of any fall in sales prices. A small amount of fixed costs gives housebuilders a low level of operational gearing, which makes them highly sensitive to fluctuations in sales prices. On average, every 1 per cent fall in prices results in a 5 per cent reduction in operating profits, according to analysis from Peel Hunt. There is also the cash burned while implementing safe working protocols to consider, and the extent to which supply chain disruption will result in build cost inflation beginning to rise once again. If payouts are restored during the second half of this year, they are expected to be at lower levels than the preceding year – the payment anticipated this year by former dividend king Persimmon (PSN) is less than half that of 2019 at 106.4p a share, based on FactSet-compiled consensus forecasts.
Is there value on offer from investing in the housebuilding sector?
Although valuations have come down over the past three months, most housebuilders continue to trade at premiums to net asset value (NAV) and forecast NAV for this year. Valuations range from Persimmon at the top end at 1.9 times NAV, based on forecasts for the December year-end, and Crest Nicholson at the bottom end of the sector at a multiple of 0.7. However, there is the chance that NAVs could come in short of expectations if market transactions and sales prices suffer more than anticipated this year. Those with greater exposure to the affordable housing market such as Vistry (VTY), which trades at 0.8 times consensus forecast NAV, may be better placed to withstand such disruption to activity levels.
