Deutsche Bank bullish on 2017

Steve Menary

Steve Menary Steve Menary looks at the market in the early days of 2017 where there is still much positivity. London, however, is like “another country” – but where the private rented sector may soon play a bigger role

The stock markets finished 2016 on a strong run but housebuilders are still lagging behind other sectors.

After that seismic Brexit vote, Persimmon’s market value slumped by circa 15% – or £1 billion – but Deutsche Bank began the year by arguing the case that the sector is undervalued by nearly 30%.

In a bullish research note, the German broker raised its target price on Barratt from 575p to 605p and to Taylor Wimpey from 218p to 239p, while reiterating “buy” ratings on both stocks.

Barratt and TW led the FTSE 100 charge on the day in January that Deutsche Bank issued those upgrades, and a day later the other member of the big three emulated its two peers.

Persimmon’s stock closed up 7% after issuing a trading update showing that forward orders are up 12% to £1.2 billion, while average selling prices have increased 4% to £206,700.

That Persimmon’s update was issued on the same day that Savills aired further fears about the weakening London market illustrates how detached the new build sector is from the capital.

On the same day that Savills reported a 6.9% fall in prime central London property prices for 2016, Persimmon’s stock rose 7%.

It seems that London is another country all of its own for the volume housebuilders.

Nationwide data showed that house prices in London grew at a slower rate than the national average in 2016. Across the UK, prices rose 4.5% against 3.7% for the capital.

The last time that the capital was outperformed by the national average was at the height of the global financial crisis. Prices are certainly toppy. The average price of a house in the capital was £473,073 in Q4 2016 against a countrywide figure of £205,937.

Those figures include all prices, whereas in the last financial round-up in this column in November 2016 the average selling price (ASP) for new build homes sold across the UK by the 17 plcs that disclosed a figure was £263,331.

Average selling prices
The growth in new build ASPs has faltered along with turnover and completions but both the rate of growth and size of the ASP remain ahead of the national average given by Nationwide.

On average, the ASP at plcs rose 16.3% in the first half of 2015 but by the second half of last year the median rise was 10.6%. That though is a national figure.

To put those figures and the concerns over the capital in context, the ASP for homes in the pipeline at London-centric Telford Homes is £517,000.

The ASP at Berkeley, which also has heavy exposure to the capital, is higher still at £655,000. With sales actually slipping to 2,076 units (2015: 2,091) in the interim accounts, only a 29% rise in selling prices helped the group push profits up a third to £392.7 million (2015: £293.3 million).

The management is committed to an ambitious share return policy, but is also concerned that “current shortterm macro volatility” has affected the share price.

Bullish notes from the likes of Deutsche Bank and a rise in share prices might salve some of the fretting amongst Berkeley’s management in the short term, but a slump in London property prices is hardly a macro problem.

Given the chasm between average earnings and prices – particularly for new build units – the problem will not be short term either.

Warnings of the overheated London market have percolated through the City for some time.

Over Christmas, Bovis, in delivering a profit warning and ahead of ceo David Ritchie’s departure, said that its land buying was “continuing to focus on high quality consented land in prime locations outside the capital.”

That is hardly a ringing endorsement for building in London, and the problems of building there will surely not be ignored in the Housing White Paper due from communities secretary Sajid Javid as this column was being written.

Many governments have talked up attempts to resolve the lack of housing, which is an economic cruiser ship of a problem that will take years to resolve, but signs that the private rental sector (PRS) could slowly come good are emerging.

In December, the privately owned Dandara group secured £45 million to build more than 2,000 PRS units in Birmingham, Leeds and Manchester, while Telford sold a PRS scheme in east London for £48.6 million to M&G Real Estate.

The scheme was the third PRS sale by Telford and the second to M&G. Telford chief executive Jon Di-Stefano is keen on the certainty of future revenue and cash flow and lack of debt finance required in PRS.

In a London residential environment showing signs of sustained weakness PRS clearly has a role to play, which may allow larger nationwide players to eventually return.

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