The rise of the property business

It’s a sad day when you realise that if I had invested in the listed housebuilder sector at the start of 2015 I’d be around 40% richer at the end of 2015. But there is no surprise with such strong demand for housing, low interest rates (which are expected to remain low for the rest of 2016!) and favorable government policies like Help to Buy. An analysis shows it’s not just external factors aiding this performance, profit margins rose also to 11.7%, which is higher than the 11.2% high of 2007. More indication of the top of the market nearing?

 

In 2015, housebuilders outperformed all other equities in 2015 with a 40% rise in value - the next-best-performing sector was construction and building materials (25.1%) – can we see a common theme here, while real estate investment services (REIS) posted a 15.5% rise. Clearly property, in 2015, was where to put the money and so far in 2016 this is continuing. We now have four housebuilders in the FTSE 100 following the admission of Berkeley and the recent listing of Countryside (albeit at the bottom of the price range).

 

Looking closer though, housebuilders are benefiting pretty well from a much wider point – between 2011 - 2014 only 460,000 homes were built compared to the 974,000 that were required. In 2015 we were around 70,000 short of what most experts think was required. So we have a supply shortage but are housebuilders contributing to this? Well I can’t speak for everyone but from conversations I have had with small and large housebuilders they want to build more but are restricted due to varying reasons – financing, skills, planning etc etc. As long as the construction activity lags behind demand, prices are likely to continue to rise, exacerbating the current affordability crunch and potentially slowing down the market.

 

Though it is not all doom and gloom. For those able to scrape together a deposit a new study has shown that this could be the best time of year to bad a property bargain - you could slice an average of £69,000 off the price by buying a property at this time of year compared to August, says My Home Move. I really don’t know about you but I certainly couldn’t afford a house in January/February – still paying off Christmas, let alone legal fees and stamp duty!

Planning, touching on this earlier, is an ongoing discussion with legislative controls increasing in recent years. So much so the government has commissioned a “Red Tape Review”. But why is this needed – the main issue I hear is unnecessary delays – it typically takes between 12-14 weeks for a planning decision to be reached, but similar to the endless excuses for train delays there is the same here with system glitches and poor communication. Now a large housebuilder, although frustrating to have a delay, will no doubt have multple planning approvals in so it’s not the end of the world. A SME housebuilder may have one or two in the process so a delay can lead to significant financial difficulty.

 

So why not increase transparency of the process and make it consistent across the board. The standards need revising so invest in clearer standards of design and technical specifications and if you do refuse planning allow for a speedy fast track back to the top of the queue if you amend the points raised. The final point is to invest in the process. The delays come from overworked teams – there needs to be resource or innovation to reduce workloads – automation for part of the process maybe?

Whatever way you look at it you can list pros and cons – whether housebuilders, people, banks and so forth – the truth is that until collectively a plan to resolve UK housing is put in place then we’ll keep on having the debate.

 

Feel free to contact me 0113 288 2276 or lee.a.wilkinson@uk.pwc.com if you wish to discuss this blog or anything relevant to property and construction.

 

Enjoy the weekend

Lee