This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Guy Anderson, Fund Manager, The Mercantile Investment Trust and Jonathan Ingram, Fund Manager, JPM UK Dynamic Fund confirm why they are sticking with the housebuilders.
Recently release government figures show that more than 17,000 households bought homes under the Help to Buy scheme in its first nine months. They also showed that 88% of the 17,395 were first-time buyers. Clearly Prime Minister David Cameron’s scheme to support the housing market is working, in the sense that it is providing opportunity to aspiring homeowners. While concerns are being raised about the possibility of a UK housing bubble, investors are also looking at stocks in the housebuilder sector to determine whether they still present a compelling opportunity.
We are seeing strong performance of the house builders against a backdrop of a recovering UK economy – this is a cyclical sector, after all. That said, and despite where we are in valuations relative to earlier in the cycle, we think there is additional room for further outperformance.
Although they’ve steadily climbed over the past two years (our positions pre-date this rise) there has been some stuttering in recent months amid question marks over the sustainability of the revival, as well as concerns over potential removal of government stimulus. We do not share this view, and expect the recovery to continue from here.
We are keeping a close eye on all of these factors, but many of the house builder shares continue to exhibit the characteristics that we seek, attractive mid and small cap UK names where the outcome continues to beat expectations.
Longer term, the extension of the equity loan scheme for an extra four years should support the construction of 120,000 additional homes.
While admittedly not without risk, the UK house builders sector continues to be an area where we see opportunity. We’ve been positive on the sector for some time, including before the withdrawal of the Funding for Lending Scheme last year. We stuck with our overweight position then because we actually saw that as a positive development - it suggested the Bank of England viewed the lending recovery as self-sustaining.
Now with this extension of the Help to Buy scheme we have continued support for consumers to climb the housing ladder. The government helping to subsidise demand will continue underpinning prices. Meanwhile, UK supply is not keeping pace, which is another technical factor supporting prices. Housing transaction forecasts for this year are still well below peak, mortgage rates have come down and capital and interest rates are reasonable. On the balance of that, we’re sticking with the housebuilders.
Two shares that we like for playing the house builder theme indirectly are Countrywide PLC, the UK’s largest estate agency and lettings network and Lloyds Banking Group (LLOY), which should be well positioned to grow its revenue in line with higher mortgage volumes whilst bad debts should decline as house prices improve.
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