UK housing: Why you should bank on builders Barratt, Berkeley and Bellway

Wednesday, Mar 09 2016 by

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The Brexit debate over Britain's upcoming "Stay or Go" EU referendum has had some obvious effects in financial markets, not least on sterling, which has weakened markedly against both the US dollar and the euro in recent weeks.

A more surprising casualty of the economic uncertainty thrown up by Brexit is the UK housebuilding sector. Why should this be the case, given that this is an exclusively domestically-oriented industry?

Housebuilders have been left behind over the last month

1. Housebuilders still near 2016 lows1. Housebuilders still near 2016 lowsBloomberg

While the bellwether FTSE 100 stock market index has recovered nearly all of the ground lost between the start of the year and early February, housebuilders like Barratt Development, Berkeley Group and Bellway have struggled. Over the year to date, the FTSE 100 has lost just 1%, while these housebuilders have lost on average 12% (Ch

But the long-term is a completely different story

2. Since the year 2000, housebuilders have left the FTSE 100 for dead2. Since the year 2000, housebuilders have left the FTSE 100 for deadBloomberg

That is all very short-term. But if we pan out and look at a much longer time frame such as since the year 2000, we get a completely different story.

While housebuilders have enjoyed massive highs and suffered crushing lows over time, the last 16 years have seen house builders gain 340% while the FTSE 100 has gone precisely nowhere (Chart 2).

Investors worry about a construction slowdown

A key negative driving housebuilding shares lower is the worry that the UK construction sector is slowing down.

3. UK construction activity growth is slowing3. UK construction activity growth is slowingMarkit

It is true that the recent Market/CIPS survey of activity in the sector revealed slowing growth but activity is still growing, albeit at a slower pace than previously. (Chart 3).

On the other hand, house price trends have remained remarkably robust, judging by the most recent readings from the Royal Institute of Chartered Surveyors' (RICS) monthly housing survey.

4. RICS housing survey supports housebuilders

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My opinions only, not investment recommendations: Please Do Your Own Research

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Barratt Developments PLC is a holding company. The Company is principally engaged in acquiring and developing land, planning, designing and constructing residential property developments and selling the homes, which it builds throughout Britain. The Company operates in two segments: Housebuilding and Commercial developments. Its housebuilding segment operates through approximately six regions and approximately 30 operating divisions delivering over 17,319 homes. Its Commercial developments are delivered by Wilson Bowden developments. It purchases land in targeted locations and designs homes for its customers using standard house designs. Its brands include Barratt Homes, David Wilson Homes and Barratt London. Its Barratt Homes brand focuses on making homes. Its Barratt London brand portfolio offers apartments and penthouses in Westminster to riverside communities in Fulham. Its David Wilson Homes brand offers home design and specification, and focuses on developing family homes. more »

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The Berkeley Group Holdings plc is a holding company. The Company, along with its subsidiaries, is engaged in residential-led, mixed-use property development. Its segments include Residential-led mixed-use development and Other activities. Its brands include Berkeley, which creates medium to large-scale developments in towns, cities and the countryside, encompassing executive homes, mixed use schemes, riverside apartments, refurbished historic buildings and urban loft spaces; St George, which is involved in mixed use sustainable regeneration in London; St James, which handles projects that embrace private residential development, commercial property, recreational and community facilities; St Edward, which offers residentially led developments, and St William. Berkeley First is a division of the Company specializing in student accommodation and mixed use residential development within London and the South East. Berkeley Commercial is its commercial property developer and investor. more »

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Bellway p.l.c is a holding company of the Bellway Group of companies. The Company is engaged in the building and selling of homes, ranging from one-bedroom apartments up to five-bedroom family homes, as well as providing social housing-to-housing associations. It focuses on providing traditional family housing outside of London and apartments within the London boroughs, in zone 2 and beyond. It operates in 19 trading divisions in England, Scotland and Wales: Durham, East Midlands, Essex, Kent, Manchester, North East, North London, North West, Northern Home Counties, Scotland, South London, South Midlands, South West, Thames Gateway, Thames Valley, Wales, Wessex, West Midlands and Yorkshire. It also offers second-hand homes of various types, such as detached, apartment, terraced, semi-detached, town house, bungalow and penthouse. It also offers various additions covering kitchens, electrical, fire surround and fire, ceramic tiling, flooring, bathrooms and gardens, among others. more »

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10 Posts on this Thread show/hide all

dmjram 10th Mar '16 1 of 10

"A more surprising casualty of the economic uncertainty thrown up by Brexit is the UK housebuilding sector. Why should this be the case, given that this is an exclusively domestically-oriented industry?"

Because while supply is domestic, demand, especially in London/south east is not. There are huge numbers of overseas buyers for property there parking their cash in what is considered a safe haven coupled with huge numbers of workers (London banks, Honda at Swindon etc etc) whose future post UK exit would be uncertain.

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Mike888 10th Mar '16 2 of 10

I agree with dmjram

I will be surprised to see us leave the EU because in truth it is very unlikely that those advocating leaving will be able to put forward an argument that, by its very nature, is anything other than speculative. In such circumstances invariably the voter will go for what is known rather than vote for what is guessed.

On this basis I think builders will be an excellent investment opportunity, but I'd argue that now maybe isn't the time to invest in them as I suspect further downward pressure. Wait for the vote, and if it's a "stay in the EU", fill your boots.

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Mike888 10th Mar '16 3 of 10

Also we shouldn't forget the demand for skilled workers in the building industry is outstripping domestic supply and I guess therefore much of this shortfall is coming from the EU. So both demand for building houses and also labour to fulfil that demand will be driving the sentiment of anxious investors. Either way my point above stands, wait for the vote....

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herbie47 10th Mar '16 4 of 10

Its not only Brexit that is worrying investors, its also China and a global recession. You remember housebuilders in the last recession? Also profit growth has slowed down from a few years ago as house price also slow but costs are going up, labour and raw materials as £ falls. As for EU I think we will stay in, the fear factor as in Scotland will win. I think it maybe a mistake as I see EU getting worse. I sold most of my housebuilders last year, yes they are looking better value now but I agree best to wait until nearer the vote.

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Edmund Shing 11th Mar '16 5 of 10

Hi there,
these are all fair points, but I would argue that these fears are perhaps overstated.
Foreign buyers or not in London (not really in the South East), the key driver behind demand particularly for new-build property is still largely domestic, especially for the likes of Berkeley Group who tend to build houses rather than flats.

Domestic demand is driven much more by the London economy, which remains buoyant for now. True that in the event of Brexit, the City of London would suffer and this dynamic might well weaken. But then again, I would argue that the valuation of these housebuilders already integrates much if not all of this risk.

At the very least, if you follow the Brexit betting patterns, the probability is that the UK will remain in the EU, in which case these housebuilders can benefit from the removal of this fear.


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herbie47 11th Mar '16 6 of 10

In reply to post #123626

You maybe correct, time will tell. I had similar discussion in Investors Chronicle last December when Simon Thompson did his housebuilders article, you may have seen, Dec-March housebuilders go up nearly every year, well looks like they didn't this time.
Demand is demand, if you suddenly lose buyers for high prices properties as seems to be happening in London then it will affect prices. Also there have been changes to BLT (Buy to Let) properties this could also weaken demand. Just like last year before the election a lot of projects were put on hold this may happen again with Brexit. With uncertainty investors tend to sell rather than buy. If the vote gets close then I think there will be more opportunities to buy.

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Flackwell 11th Mar '16 7 of 10

In reply to post #123548

How on earth can you say speculative when history shows there was an EU without british membership?

and why do you not think remaining in the EU is equally speculative (using your measure) - as the rules seem to change by the hour

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autonomatt 11th Mar '16 8 of 10

What about the upcoming budget? Is it not possible that restrictions to mortgage interest reliefs for buy-to-let investors could have a negative impact on Berkeley Group's share price?

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BlueFrew 11th Mar '16 9 of 10

House prices have been bid up by the very greatest of the greater fools buying at these prices. Stamp duty changes will kill Buy To Let demand in April. Clause 24 will hammer the final nails in the coffin of that particular socially disasterous idea.

So we'll be left with house prices at 6,7, maybe up to 10x earnings in places. How will that work when MMR puts a hard limit of 4.5x on owner occupier borrowing?

House prices are heading lower over 2016/17. Good luck holding house builders when the demand for their product collapses unless they sell at significantly lower prices.

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underscored 13th Mar '16 10 of 10

Fraud, mania and insanely loose global monetary policy. Totally divorced from fundamentals.

Still I am sure it will end well

I am thinking of floating a company investing in tulip bulbs. Anyone want in on the IPO, once in a lifetime opportunity ;)

hmm, a little googling -

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