Barratt Development, more good news for UK house builders

Barratt Developments share price may be down slightly today, but that is probably more due to the general market being down and the fact that in recent days it went up on the back of other good trading updates from listed UK construction companies, than any bad sentiment towards the company. The share has had an amazingly good run the last 18 months or so, like others in the sector defying bear calls that it is overvalued. 

That run looks set to continue as Barratt follows others by confirming that the Government's Help to Buy scheme is playing its part.

Mark Clare, Group Chief Executive commented,

"As more house buyers return to the market, supported by improved mortgage availability and the Help to Buy scheme, we are in a strong position to continue to grow the value of the business. We are increasing our investment in land whilst reducing debt and have delivered a performance ahead of expectations. Momentum is continuing to build and with forward sales up substantially, we are confident we can improve our performance still further in the year ahead."

http://www.digitallook.com/news/rns/21017935-10120/BDEV-Trading_Statement_html?ac=,&username=,

While valuations of UK house builders are already stretched and there is a lot of good news already baked into their share price cake, don't be surprised if we seeing the still early stages of a bubble in prices for these companies.

More posts on house prices and house builders below:

Help to Buy, the new housing benefit

Bovis Homes update

Taylor Wimpey benefits from Help to Buy

Persimmon reports

Telford Homes update

UK house prices, case of too big to fail.

Help to Buy, the new housing benefit?

Bovis Homes reported today, following on from a number of trading statements towards the end of last week from other house builders and as expected the news was good.

David Ritchie, the Chief Executive of Bovis Homes Group PLC said:

"The Group has performed well in the first half of 2013 with a significant further improvement in housing profit, delivered from the ongoing successful execution of the Group's growth strategy. Trading in the first half of 2013 has been strong and the Group has achieved a 40% increase in private reservations compared to the same period in 2012. Continuing its success in the land market, the Group has added 2,767 new consented plots to the land bank. With the positive progress in executing its growth strategy, the Group is well positioned to deliver higher shareholder returns."

It goes on.

Market conditions

Even though the general economic background remains challenging, the housing market has shown signs of strong improvement. Consumers are increasingly able to access mortgage finance and the launch of the Help to Buy shared equity scheme, replacing FirstBuy, has had a positive effect on customers' confidence to buy a home and their ability to transact. These positive effects are expected to support greater activity in the new homes market, which in turn will provide an impetus to the number of new homes built. The Group continues to view positively the Government's initiatives to support the housebuilding sector.

http://www.digitallook.com/news/rns/21012367-11178/BVS-Trading_update_html

Of course it does.  How can any company not be thankful that the Government is potentially poring billions of pounds in taxpayer money its way? Supposedly this is to kick start a market that hadn't really seen a big fall after the financial crisis set in, but in reality was effectively dying a death from inactivity because of what happened before the financial crash.

FTSE shuffle time, Russian miners out, builders to get promoted?

It is perhaps a sign of the times that the quarterly FTSE100 reshuffle due to be announced this week could see a couple of under performing miners drop out, replaced by companies from the bullish construction sector.

Both Evraz, the steelmaker and iron ore producer in which Chelsea FC-owner Roman Abramovich has a major stake, and precious metals miner Polymetal International are expected to be relegated from the main board at this week's FTSE Group quarterly index review.

Buoyed by signs of a recovery in the housing market, which has stoked demand for their shares, analysts say Travis and Persimmon are in line to take their places.

http://www.telegraph.co.uk/finance/markets/10108670/Persimmon-and-Travis-Perkins-head-for-the-FTSE-100.html

Travis shares are up 40%, Persimmon 50% this year, in part driven by the Help to Buy intervention of the UK Government, widely seen as a potentially dangerous prop to the housing market, but the type of policy typically undertaken by the politicians when house prices stop going up.

"The wider construction market obviously remains under pressure but housebuilding is an important component of what Travis does," said Andrew Nussey, an analyst at Peel Hunt. He said the Government's Help to Buy scheme had aided homebuilders, Travis' "principal customer base". and "more activity from the housebuilders translates into more business for Travis".

http://www.telegraph.co.uk/finance/markets/10108670/Persimmon-and-Travis-Perkins-head-for-the-FTSE-100.html

Persimmon currently trades on a P/E of over 20, Travis 16.1, so both have generous valuations, but are clearly in a sector that should benefit for the next 2 to 3 years from Government intervention.

Meanwhile, despite the bullish stock market move since the new year, Evraz is down almost 50% in that time, Polymetal around 35%.

Bovis Homes, IMS confirms more buying interest thanks to Government help

Following on the theme set out here that UK house prices cannot be allowed to fall by any significant level, it has been interesting to read the management reports of market quoted companies like Taylor Wimpey, Barratt, etc as to any pick up in business since the Government announced its intention to help prop up the market in the last budget. Today Bovis Homes reported and they basically confirm what we already should know by now, that house building construction should continue its bullish trend going forward.

They reported;

David Ritchie, Chief Executive, commented:

"The ongoing success of the Group's growth strategy has driven strong trading in early 2013.  Homebuyer sentiment has been improving and, with the recently announced Government initiatives, sales rates have increased ahead of management's expectations.  The increased number of active sales outlets in excellent locations, delivered from the Group's assertive land buying over the last few years, provides a great opportunity to take advantage of the improving market backdrop and further strengthen shareholder returns."

Current trading

Trading in the 19 weeks to 10 May 2013 has been strong with the Group achieving 989 private net reservations (2012: 783), a 26% increase year on year.  This has been driven by an 11% increase in the average number of active sales outlets to 91 (2012: 82), and a 14% improvement in the average private sales rate to 0.57 net reservations per site per week (2012: 0.50).  The number of visitors to the Group's sites has increased by 29% in the year to date compared to the same period last year.

http://www.digitallook.com/news/rns/20899760-11178/BVS-Interim_Management_Statement_html

Valuations of these companies may well be stretched already, but momentum is with it and the sector is likely to remain bullish given the size of Government intervention. It is unlikely that Government will do anything to harm this sentiment given the importance of the home owning/desire for ownership vote that exists in the UK. Regardless of who the Government is, they are likely to throw taxpayer money at the housing sector if at any stage prices look to be lagging or demand is down because people can't afford to buy because prices are too high. Their answer to high prices is always to provide subsidies to buyers, I doubt that will end any time soon.

 

Government completes first Help to Buy deal, Taylor Wimpey benefits

So, after the Government announcement in the last budget of their intention to prop up house prices with the Help to Buy scheme, the first beneficiaries are moving into their taxpayer backed home.

The first property deal under the Government’s Help to Buy has just been finalised on a Taylor Wimpey home in Liverpool.

A young couple relocating to the North West from Northern Ireland have bought the three bedroom home at Taylor Wimpey’s Speakman Gardens development in Prescot.

The housebuilder said it has seen a rise in visitor levels and new home reservations this year, as a result of improvements in consumer confidence.

Taylor Wimpey go on to say;

Peter Redfern, chief executive of Taylor Wimpey, commented: “The new Help to Buy housing measures have been welcome news for home hunters.

“We have seen significant increases in customer interest following its announcement and the scheme has already proven popular for those looking to get onto or move up the housing ladder.

“In fact, since its launch on 1 April, we have helped customers purchase, reserve or register their interest in an additional 300 homes.

“The measures announced by the Chancellor will help home builders get Britain building and add a welcome vibrancy to both the new and second hand market over the next three years.

http://bdaily.co.uk/industrials/30-04-2013/first-help-to-buy-deal-completes-in-liverpool/

Persimmon reported, as mentioned here, that they were seeing an increase in interest after the budget and now Taylor Wimpey  join them.  As suggested here, the UK housing market is too big to be allowed to fail, and it would seem the latest scheme could well be quite popular, especially with the housebuilders.

Persimmon reports, another house builder seeing the benefits of Government intervention

One of the themes developing here is that it will be interesting to follow going forward the continued effect of Government and Central Bank intervention on the UK housing market and the benefit of this to UK quoted companies. I state the bullish case here and here and while I personally believe that UK house prices are too high and should fall if only a traditional free market response was in play, the reality is very different. With this in mind, this intervention can be monitored in part by keeping an eye on what the construction companies themselves are reporting.

This is what FTSE250 Persimmon had to say today.

We are encouraged by the announcements made in the Budget with respect to the Government's support both for customers wishing to enter the housing market and for those existing homeowners who aspire to move home. These "Help to Buy" measures include the provision of a Government backed 20% shared equity scheme commencing on 1 April 2013 to support customers who wish to buy a new build home. In addition, we look forward to working with the Government to develop the Government Mortgage Guarantee Scheme which is to be launched from 1 January 2014. We anticipate that this new Scheme will help mortgage lenders provide greater access to mortgage credit with smaller customer deposits at affordable interest rates.

As a result of these "Help to Buy" announcements customer enquiries registered on our Persimmon Homes and Charles Church web sites increased. Up until mid March enquiry levels had been running c.24% ahead of the prior year but following the announcement of the "Help to Buy" measures this improvement increased further to c.30%. We have experienced encouraging improvements in both visitor numbers and reservations at our developments over the last two weeks. Whilst it remains too early to measure any increase in legal completions as a result of the "Help to Buy" Scheme, we remain confident of the strength of underlying demand for new homes in the UK and that these measures will support an increase in the number of new homes delivered by the industry over the medium term.

http://www.digitallook.com/news/rns/20835756-10277/PSN-Interim_Management_Statement_html?ac=,&username=,

Whether we like it or not it would be foolish to overlook the likely impact of the intervention to come, there are few reasons to be bearish when it comes to housing stocks. One would have thought that only the badly managed ones will miss out.

Telford Homes - impressive trading update

Because of the reasons given here it is difficult not to be bullish about UK house building stocks and if further proof were needed it came in a trading update from Telford Homes today. Reading through the high points it is difficult to believe that the UK housing market, at least in terms of sales, is going through a bit of a slump, but Telford is London biased. Many housebuilders seem to be reporting good business, something which can only be increased by further Government intervention.

The company reported.

Exceptional levels of demand with contracts exchanged for the sale of 803 open market properties in the year to 31 March 2013 (2012: 460) Strong demand from overseas investors for London property; however over 60 per cent of the exchanges in the year were sold to UK buyers Already 94 per cent pre-sold for the year to 31 March 2014 and over 50 per cent pre-sold for each of the two following years

Significant improvement in both gross and operating margins

Profit before tax for the year to 31 March 2013 will be ahead of market expectations

Net debt reduced significantly to under £35 million (2012: £54.6 million)

 The outlook presented today is about as positive as you could want it.

Outlook

The London property market remains encouraging and the Group's forward sales position, increasing margins, healthy development pipeline and enhanced financial strength are all reasons to look forward to the next few years.

The Board is confident that substantial growth in profit levels can be achieved over the next three years from the existing pipeline and has a long term strategy to further this growth, in London, over the next five to ten years.

http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail.html?announcementId=11554068

The dividend yield on this one is pretty low and the P/E looks stretched, but you pay for quality like this. Momentum in the share price is also up so things look stretched here as well, but as can be seen on the weekly chart below, a new breakout appears under way.

UK house prices, the case of a too big to fail market.

I've seen a few housing bubbles and it took me a while to realise and see that conventional economic thinking when applied to house prices simply doesn't work, at least not in the UK. In part it isn't allowed to work because the UK housing market isn't a truly free market. It tends to be free when prices are going up, but as soon as price rises start to hit a blip then we get intervention, the strong vested interests of the housing industry start knocking on the door of Government asking what are they going to do about it.

Traditional free market theory tells us that Government should do nothing, markets should be allowed to correct, but the UK housing market has become a "too big to fail" market.  Too big to fail because of the knock on effect of the fall out on both the financial and general economy that would come from any correction.

First, any significant fall in house prices would hit the already under pressure UK banks. These are the same banks that are largely responsible for the problem in the first place as they relaxed their lending criteria and lived the good life on the back of the mortgage credit boom pre-2008. Given their ongoing potential liabilities, falling house prices would only make things worse.

Second, UK property owners have increasingly seen their wealth as being in property. The growth of home ownership since the early 1980's has been seen as much as an investment as somewhere to live and call your own home. The UK obsession with property and rising or falling house prices has a political impact in that politicians know that these people are more likely to be older and vote. Any Government risks the wrath of the electorate and losing votes on the back of any fall in house prices.

Third, it should also be remembered that politicians themselves are usually personally invested in property, quite a few have their own property empires as the expenses scandal of a few years ago showed. It is not in their own interest to see falling prices.

So, Government and Central Banks tends to intervene because choosing not to has a free market consequence that is dangerous to the whole economy. If banks go under credit would dry up, businesses would go to the wall, spending would fall, recession, potential depression would be on the cards.

UK Budget update 1 - Construction Sector

One of the biggest announcements made in the budget today was aimed at the UK housing market.

The Help to Buy scheme improves on a previous scheme known as FirstBuy. It enables buyers to put down a 5% deposit on a newly built home.

Up to 20% of the cost of the home is funded by a "shared equity" loan, which will be repayable when the home is sold.

That loan will be interest-free for the first five years.

Thereafter borrowers will have to pay a 1.75% annual fee, which will then rise by 1% above the Retail Prices Index (RPI) measure of inflation.

There is also a new mortgage guarantee scheme that is being compared to Fannie Mae and Freddie Mac in the US.

The chancellor also announced a new mortgage guarantee, which he claimed would dramatically increase the availability of loans. It extends the previous NewBuy Guarantee scheme to include older houses as well as new-builds.

"We're going to help families who want a mortgage for any home they're buying, old or new, but who cannot begin to afford the kind of deposits being demanded today," he said.

http://www.bbc.co.uk/news/business-21849974

No one should be surprised at Government attempts to prop up house prices under the disguise of "helping" people, usually priced out first time buyers, who are of course priced out for a reason - prices are too high. The immediate effect of this policy has been on the share price of companies in the construction sectors, most of which are seeing a big rise today. Taylor Wimpey, Barrett Development, Redrow and others are all doing well on the back of this news as they are likely to benefit from being in the new build sector.

On the other hand, once the dust settles and people realize that house prices are still too high for those priced out it will be interesting to see how high the take up is and how relaxed the Government are when handing out taxpayers money. The recent history of Fannie May and Freddie Mac is not one that should be held up as shining light of achievement. The UK Government seems to have decided that the UK taxpayer, whether you are currently a property owner or not, will be a potential tax loser if house prices fall.

Quantitative easing - a case of the rich getting richer

According to a report from the Bank of England, the richest 10% of the UK have seen their assets rise by an average of £128,000 or £322,000 depending upon the methodology used.

The Guardian reports;

Threadneedle Street said that wealthy families had been the biggest beneficiaries of its £375bn quantitative-easing (QE) programme, under which it has been buying government gilts for cash since early 2009.

The Bank of England calculated that the value of shares and bonds had risen by 26% – or £600bn – as a result of the policy, equivalent to £10,000 for each household in the UK. It added, however, that 40% of the gains went to the richest 5% of households.

However, the Bank was also quick to point out that everyone had supposedly gained because without QE, the economy would have been in a deeper mess.

 "Without the Bank's asset purchases, most people in the UK would have been worse off," it said in a paper prepared in response to queries from the Commons Treasury committee. 

The Bank's strategy has been criticised by groups representing savers and pensioners because of its impact on interest rates, annuity rates and gilt yields, which have all fallen since QE began, but Threadneedle Street was unrepentant. 

"Economic growth would have been lower. Unemployment would have been higher. Many more firms would have gone out of business. This would have had a significant detrimental impact on savers and pensioners along with every other group in our society. All assessments of asset purchases must be seen in that light."

This last statement is undoubtedly true, but that doesn't mean that it is right. This is the essence of the problem that money printing to try and prop up what became an indefensible situation presents us with.  It benefits those that it shouldn't, the con artists and fraudsters as well as the risk takers who lost.  It penalizes those that were prudent, who didn't get involved in things they thought were to good to be true.  And it tells you something about power and who has it.

A good example of this is UK house prices.  Prior to 2007/8 house prices had gone up every year well in advance of official price inflation on the back of loose lending, negligent regulation and the rise of mortgage products that were easy to fiddle.  Self-certifcation, designed for the self-employed and fast track mortgages were products which banks decided it was a good thing to not check the income claims of those submitting them.  Gordon Brown famously claimed after the financial collapse began in 2008 that the UK was different because unlike the US, we had not participated in products like the so-called "ninja" loans, no income, no job.  This was untrue.  The UK's equivalent of the ninja loan was self-cert and fast track, it just didn't have the same obvious fancy name and ring to it.  By 2007, 47% of mortgages in the UK were either self-cert or fast track, at a time of record mortgage lending and record house prices.  You don't need more than a couple of brain cells to rub together to see the real reasons for the UK's unsustainable housing boom prior to the credit crunch.