Investors urged to back Bricks and Mortar
Fri 28 Feb 2014
The clamour surrounding the Governments Help to Buy mortgage scheme, rising house prices and the stronger than expected recovery in the UK economy has set City tongues wagging about investment opportunities in the housing and property sectors.
The second phase of Help to Buy, which aims to help buyers with small deposits onto the property ladder, was introduced on October 8 and has already given stocks exposed to the housing market a positive boost.
City experts are also looking with renewed interest at real-estate investment trusts (Reits) that invest in commercial properties like shopping centres, offices and factories as prime beneficiaries of the economic upturn.
Help to Buy 2, which follows Help to Buy 1 and the 16 billion Funding for Lending Scheme as part of a package of state initiatives to encourage mortgage lending, has focused attention on all property-related stocks. Neil Hermon, manager of The Henderson Smaller Companies Investment Trust, likes LSL Property Services, the second largest operator of estate agents in the UK. Its brands include Your Move, Reeds Rains and Marsh & Parsons.
It is the housebuilders, though, that are attracting the most interest. The sector suffered badly at the start of the financial crisis but has been storming ahead for several years, and many fund managers expect the rally to continue. Richard Watts, manager of the Old Mutual UK Mid Cap Equity Fund, says: The sector has seen tremendous outperformance in recent years, with key companies such as Persimmon and Barratt Developments, which over the past three years have outperformed the FTSE all-share by 126 per cent and 156 per cent respectively. In our view, despite inevitable set-backs, the sector should continue to offer robust, market-leading returns.
Housebuilders have a number of factors on their side, aside from the stimulus provided by the Government. Demographics suggest the demand for new housing in the UK should run at around 260,000 units per year, but the market is only supplying half that, around 130,000. The new National Planning Policy has unleashed fresh tracts of buildable land by requiring local authorities to maintain a five year plan. Housebuilders have also benefited from building on land bought cheaply during the recession, which has lifted margins and seen earnings estimates upgraded.
Mr Watts likes the look of Barratt, while Goldman Sachs prefers Taylor Wimpey, Persimmon and the property website Rightmove. The investment bank also recommends Bovis Homes and Crest Nicholson as buys.
Bellway Homes is the choice of Stephen Williams of the stockbroker Brewin Dolphin. The housebuilder this week released a trading statement for the year to the end of July. It announced a 50 per cent increase in dividends after annual profits jumped by a third and added that Help to Buy had helped to increase its order book of reserved new homes by 54 per cent to 680 million.
However, Mr Williams warns: The housebuilding sector is cyclical, so the key is calling the top of the cycle. In the next two or three years we are going to see good profits and dividends but at some time the market is going to look forward and think it is time to ease off. It will probably be another 18 months before that situation arises.
Conceived at the height of the property boom, tax-efficient Reits were designed to attract more small investors into commercial property. When they because a reality on New Years Day in 2007 big guns of the property world including Land Securities, British Land and Segro, the former Slough Estates, were quick to convert because they are largely free of corporation tax.
Since then, their performance has been checkered. Share prices crashed as the financial crisis took hold but in recent years there have been periods when returns have been extremely strong, including this year, with strong demand from foreign investors for trophy assets in places such as Bond Street in Central London. The benefits of an above-average yield, the potential for capital appreciation and liquidity attracted many overseas investors, especially Japanese, who bought the sector aggressively in the second quarter of 2013. says Mr Williams. Since then, the sector has moved up and down quite sharply, with anxiety around whether quantitative easing would gradually be tapered off being replaced with relief that the taps are not to be switched off.
The wide gap between yields on government bonds (2.7 per cent on 10-year bonds) and property (7.5 per cent) is one reason why they have been attracting so much attention. The concern is that an end to tapering and the return of interest rates to normal levels could make their yields less appealing.
Mr Williams believes that as long as the economy keeps improving, boosting rental and dividend growth, rising interest rates need not be negative for the sector. He recommends British Land, which owns shopping centres such a Meadowhall in Sheffield, Surrey Quays in southeast London and Debenhams department store on Oxford Street. Developments currently being built include the Leadenhall Building in the City of London, popularly known as the Cheesegrater. Gillian Tiltman, manager of the M&G Global Real Estate Securities fund, expects interest rates to rise in an orderly way and, as a result, says this looks like the best entry point into commercial property stocks since 2009. She favours Land Securities, Capital & Counties, Great Portland Estates and Shaftesbury.
They are all focused on London, have direct exposure to people working, living, shopping in the centre and are going from strength to strength says Ms Tiltman.
Ben Gutteridge of Brewin Dolphin recommends that investors steer clear of open-ended property funds because they tend to sit on large amounts of cash to meet redemptions, meaning that they tend to underperform when prices are rising.
The alternative, investment trusts, are bought and sold on the stock exchange like any other company, so do not have to sell assets to repay investors who want their money back. Instead, the level of demand for the trust is reflected in its share price. If there is high demand, the shares trade at a premium to the trusts net asset value, which is the total value of its assets. Low demand pushes down the share price so it trades at a discount to NAV. Many property trusts currently are trading on large premiums, making them expensive. However, Mr Gutteridge says he is happy to recommend paying a premium, given the improving sentiment towards the UK economy. He favours F&C Commercial Property, trading on a 17.5 per cent premium.