Surprise offers opportunity

Thursday, 23rd November 2017 17:07 - by David Harbage

Given that readers will no doubt be ploughing through the finer detail of yesterday’s speech from Chancellor Hammond’s speech, this blogger will proffer brief comment.

The tax giveaway of removing stamp duty on first-time purchasers of homes valued at up to £300,000 represents an obvious political (headline grabbing) move, as well as providing a significant boost to the individuals affected. This initiative will stimulate demand for new build as well as the wider housing market, but an accompanying statement to review the status of dormant undeveloped land (having being granted planning permission) overshadowed - and resulted in falls of up to 5% in - the listed house building sector. Such surprise developments – both positive and negative – impacting share prices in a way that may seem counter-intuitive, can provide opportunity for traders and investors.

Understandably given the need for more homes, this issue has been flagged before (four times in the past 13 years) but previous investigations concluded that developers had not been slow to build. The amount of unoccupied buildings within our towns and cities – typically owned by corporations or non-resident/local individuals, rather than the large house builders – is significant and a real concern, for a number of commercial and social reasons. Such buildings or land, often publically-owned which is more shameful, incorporate the full range of property use: office, retail, warehouses and industrial land. Yesterday’s Budget announced plans to increase local taxes on such premises.  

A number of the leading house builders have already come out and expressed their belief that land they own or control is typically being developed without delay. Alan Brown, CEO of the large but privately owned, Cala Homes expects the same outcome again and said, “We don’t have a single site, of the hundreds we have, which we’re not building on”. There can be inhibitors on development – notably where ex-industrial polluted land has to be thoroughly cleaned – but the prime ‘bottlenecks’ to achieving more new homes would seem to reside in under-resourced planning departments within local council authorities. Perhaps going forward, a lack of the necessary skilled labour will prevent rapid build across all sites.

Institutional investors will no doubt be asking management of investee companies of the build status of consented land, but it seems that yesterday’s ‘knee-jerk’ markdown of prices could be overdone. Certainly company management and investors will be gaining a better perspective on government policy in regard to housing over coming days. The development of large new towns is being encouraged, and the FTSE250 constituent land developer Urban & Civic appears to be well positioned to provide new land opportunities (to other house builders as well as to build itself) in the Midlands corridors surrounding parts of Cambridgeshire, Northamptonshire and Oxfordshire.    

Yesterday, Countryside Properties - who has a significant focus on a ‘Partnership’ division specialising in building affordable homes and those ‘for rent’ - reported its full year results. The firm’s business model fits comfortably within HMG’s wish to see more build of lower priced homes. Pleasing the City, by delivering numbers at the top end of analysts’ expectations, the group appears set to grow revenue and earnings ahead of its peers over the next two years. No wish to ‘hide bad results’ here, as yesterday’s headline numbers featured a 28% increase in completions (to 3,389), a 91% increase in earnings per share (EPS of 26p), a 147% hike in dividend (to 8.4p) and a strong balance sheet (net cash of £77.4m, versus £12m) in the year to 30 September 2017. EPS is forecast to rise to 34.5p and dividend to 10.3p in the current year, which puts the shares on an undemanding price-to-earnings multiple (or PE ratio) of just under 10 times and an income yield of 3%.     

As indicated in the writer’s previous 17 November blog, entitled ‘In search of growth and value’, the builders appear to offer reasonable value as compared to the wider market. That article also mentioned a number of other apparently sensibly riced stocks, which the Chancellor’s measures are likely to impact. In particular, British Airways owner International Airline Group will have to contend with a rise in air passenger duty on its business seats (£156 to £172 in 2019). By contrast, high street retailers Dixons Carphone and Next Group could be beneficiaries of business rates being linked to the lower inflation rate applicable to the CPI, rather than RPI, index.  

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.