07 February 2018

Blog: UK Residential and the Equity market: It’s Complicated?

by Scott Fulton | 7th February 2018

The UK residential market has had a long and complicated relationship with the equity market. Almost everyone has a vested interest and, therefore, a view. From house builders to estate agents, the equity market’s commentary on relative value has been coloured by political and social, as well as economic, concerns.

Currently, the residential market is subject to a particularly heightened level of scrutiny. This is due to the apparent “crisis” in the UK housing market; too few homes sold at too high prices in the wrong structure.

House builders are increasingly accused of profiteering; restricting supply to push house price inflation, hoarding available land while being backed by Government subsidies. Traditional estate agents are under threat from hybrid and on-line disruptors, exposing the inefficiencies of the “old” model and their inability to adapt. Even these disruptors are now being questioned over whether this “new” model provides value to the customer or simply generates profits for shareholders.

Mindful of these external views, the UK equity market’s traditional scepticism is turning to outright cynicism.

Figure 1: UK Residential Share Prices (as @ close 6th February 2018)
Share price performances over the last 12 months (above) are consistent with this view. While the weighted average for the year remains positive at almost 17.0%, sentiment has turned negative with a near 12.0% fall since the start of 2018. Not one of these companies has seen a positive share price movement this year, a situation which is likely to persist for some time given the wider issues for value within equity markets.

Although there have been specific reasons for individual performances (e.g. Countrywide), the majority have reported positive current trading, for example Redrow’s interim results today (7th February 2018), often leading to modest upgrades in expectations. The share price falls appear to signal a de-rating of forecasts, with confidence in their sustainability evaporating.

In a series of articles over the next month, we will outline several points which we feel are worthy of consideration before consigning the UK residential market to “post-growth” status.

Specifically;

How Help to Buy may contain the basis for a supply-led solution to the lack of new homes. We will consider the current criticism of the scheme and refute its superficial status as a “subsidy” for house builders.

How the value in estate agency has moved too far to property portals where the cost of selling a home locally has been inflated by the cost of promoting it nationally. We will assess the relative economic models of the portals against the emerging models for estate agency and wider residential marketing.

How conveyancing represents the biggest opportunity for value creation in the UK residential market while also providing much needed efficiency gains in both the cost and time required to transact.

Within this, we will consider relative value. We do not maintain forecasts on these companies but, based on consensus, the following points occur.

As Figure 2 (below) highlights, the UK house builders appear to offer value on a PER basis, albeit that earnings growth is expected to slow over the coming two years, highlighted by a rising average PEG ratio. Against this, the builders are yielding over 5.0% in both years with those making capital returns (e.g. Barratt, Berkeley, Persimmon and Taylor Wimpey) offering premiums.

Estate Agents present a more mixed picture. The traditional agents (e.g. Countrywide and Foxtons) have experienced poor share price performances but, particularly in the case of Countrywide, have also seen forecast downgrades. As a result, they do not appear to offer value compared to the house builders at current levels. The risk that forecasts remain under pressure appears high.

Hybrids and property portals have enjoyed a reasonable performance during 2017, notwithstanding Purplebricks’ recent travails. In the context of this comparative group, they appear highly rated with limited or no yield support. However, share price performance has been driven more by the longer-term potential of the economic models and, in the case of the portals, their apparent sustainability, than immediate fundamentals.

Figure 2: Residential Market Constituent Valuations (Consensus Forecasts)
The forward visibility of earnings and, critically, cash flow, is at the heart of the potential share price performances within this sector. At present, stock market falls acknowledged, there are a lot of moving parts, not all of which are being debated currently.

We hope that, over the next month, we can raise these questions and start that debate. As ever, we are grateful for your views. If you agree or disagree with any of our analysis and views, please get in touch with Capital Access Group through your usual contacts