According to Nationwide, the London property market is heading for a “natural correction” as the pace of panic buying within the capital begins to fade.
There are also signs that other parts of the UK property market are starting to come under pressure. In particular, it was revealed this week that last month, Britain’s banks approved the lowest number of mortgages since August 2013.
And this data follows comments from both the Prime Minister and the Governor of the Bank of England, who have warned that the UK property market has problems.
These warnings are bad news for high-flying property stocks, which could be due for a correction if the market starts to slow.
Valuation stretched
Rightmove (LSE: RMV), the UK’s number one property website, is benefiting from a strange phenomenon called ‘property porn’; essentially, the trend of people viewing homes with no intention to buy.
Indeed, during January of this year, visitors to Rightmove’s website viewed a total 1.45 billion pages of property, making Rightmove one of the UK’s top websites in general.
Further, current City forecasts expect Rightmove’s pre-tax profit to jump 21% this year, followed by growth of 14% to £113m during 2015. But will this growth be enough?
Rightmove is currently trading at a forward P/E of 25, a multiple not unusual for a high growth tech company like Rightmove. However, for the company to be able to maintain this multiple, earnings will have to continue to expand at a double-digit clip, which may become tough if the property market starts to slow.
London at risk
With London house prices up 17% in the year to March, the capital is considered to be the epicenter of the UK’s housing boom. Unfortunately, this also means that the region could be the first to crack.
Foxtons (LSE: FOXT) is a well-known London estate agent, and investors have been willing to pay a premium to get their hands on the company’s shares, in order to profit from the capital’s property boom.
During the first quarter of this year, Foxton’s reported that revenue had jumped 19% to £34.1m and sales commissions surged 41% to £17.6m.
Foxton’s also has its own financing division. The company reported that mortgage revenue rose 54% during the first quarter.
As I have already mentioned, investors have been willing to pay a premium to get their hands on this growth and Foxton’s shares currently trade a forward valuation of 21 times forward earnings. If London’s property market takes a turn for the worst, Foxton’s management is going to have to work hard to convince the market that the company is worth this lofty valuation.
A cheaper pick
While Foxton’s and Rightmove look to be highly susceptible to a property market slowdown, due to their high valuations, Barratt Developments (LSE: BDEV) appears to be a better pick. Indeed, Barrett is a more diversified play with developments across the country, and the company’s earnings are expected to expand 100% this year; albeit off a low base.
With this lofty rate of growth predicted, Barrett’s shares trade at a forward P/E of 12.6 and a PEG ratio of 0.1, implying that the company’s shares offer growth at a reasonable price. These lower valuations imply that the company has more flexibility when it comes to meeting targets, unlike the company’s two peers above.
Barratt also has a certain amount of clarity over its future sales predictions. Specifically, the company reported at the beginning of May that forward sales had jumped 47% to £1.9bn, effectively locking in a years worth of revenue.
