The sector has bounced back but does it have further to go?
A report by PwC that UK house prices are unlikely to recover their 2007 peak levels in real terms until around 2020 is hardly encouraging news for the UK's house builders.
PwC expects declining real incomes and tight credit conditions to cause average house prices to drift down over the next year and recover only modestly in the next few years. Only later in the decade will the imbalance of supply and demand and improved availability of mortgages lead to stronger house price growth.
And though the house builders themselves have generally been reporting cautious optimism in the latest round of trading statements, they recognise the fragility of the market. Whatever forecasts you look at, nobody is expecting strong recovery quickly.
Except, that is, in London. Foreign investment is pushing prices in some parts of the capital up towards their 2007 levels. It comes from Asia, the Middle East, and a new source of flight capital, Southern Europe.
3 common trends
Thanks to these factors, some common trends are evident in the house building sector:
- A shift upmarket: Builders have been pushing up average selling prices in a subdued market by selling more expensive units, switching from flats to houses;
- Focus on London: Whilst the London centred builders have enjoyed better prospects, the national and regional builders are growing their presence in the capital;
- Self financing: As the average loan-to-value for a first time buyer's mortgage has fallen from around 90% to 75%, some of the difference has been made up by government schemes, and some by self-funding from the builders, typically loans of 15% to 25%. However this ties up capital which would normally be recycled into further land purchases. And at best, if PwC's analysis is to be believed, it is capital which will generate little return for many years.
7 big players
There are seven large players in the sector, whose total capitalisation fell from a peak of £22bn in 2007 to a low of £3bn in 2008, and is now £7bn.
| | Year End | Market cap | Revenues | Op Margin |
|---|
| Berkeley (LSE: BKG) | 30 April | £1,638m | £742m | 18.3% |
| Persimmon (LSE: PSN) | 31 Dec | £1,427m | £1,569m | 13.0% |
| Taylor Wimpey (LSE: TW) | 31 Dec | £1,185m | £2,603m | 4.7% |
| Barratt (LSE: BDEV) | 30 June | £1,024m | £2,035m | 3.7% |
| Bellway (LSE: BWY) | 31 July | £821m | £768m | 6.7% |
| Bovis (LSE: BVS) | 31 Dec | £583m | £299m | 7.2% |
| Redrow (LSE: RDW) | 30 June | £396m | £397m | 3.2% |
Berkeley benefits from its focus on upmarket London housing. Having bought land immediately after the financial crisis, it has set out a strategic plan which includes returning £1.7bn to shareholders in dividends over the next ten years.
Persimmon, Taylor Wimpey and Barratt Developments are the volume builders. They have all switched from building flats, which were over-supplied in 2007-8, to houses.
Taylor Wimpey has the highest net gearing in the sector, at 36%, but this will come down when the £600m proceeds of the sale of its North American business comes through. It has a double digit margin target for 2012.
Barratt remained in the red at its half year to 31 December 2010, but losses were substantially reduced, and recently the company said it was on track to deliver a substantial improvement in operating profit. A debt refinancing provides the company with £1bn of committed facilities to May 2015, reducing its financial risk.
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Bellway has increased its land bank in the South East, and sold 9% more units in the first half of the year at an average 4% higher price, benefitting from a change in product mix and increased sale in and around London.
Bovis is also reaping the rewards of a land buying programme in the south of the country, with sales in the first half of the year up 23% after stripping out a one-off sale to a joint venture last year.
Redrow is the clearest example of how the opportunity in the market is skewed towards the South East. It has just sold its Scottish business for £49m to invest in growing its presence in and around London.
Valuation
Last week I described hybrid constructor and house builder Galliford Try (LSE:GFRD) as a relatively safe play on the housing market as its cash-generating construction side compliments it house building, and it is still my preferred pick.
Here's how the big 7 look right now:
| | Fwd P/E | Yield | Price/Book |
|---|
| Berkeley | 14.8 | 0.2% | 1.8 |
| Persimmon | 14.7 | 1.8% | 0.8 |
| Taylor Wimpey | 18.5 | 0.3% | 0.7 |
| Barratt | 43.8 | 0.1% | 0.4 |
| Bellway | 17.8 | 1.6% | 0.8 |
| Bovis | 26.9 | 1.2% | 0.8 |
| Redrow | 29.8 | 0.1% | 0.9 |
Of the mainstream builders, Taylor Wimpey is perhaps the most promising recovering play, with Barratt a more extreme version, almost a deep value play. Berkeley is a safer bet, but more expensive.
More on the markets:
> Tony has shares in Galliford Try.
