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Housebuilders: from the ground up

The worst performing UK Index sector in the final trading session of November are the Housebuilders (-3.6% in aggregate). This in spite of Nationwide House Price data showing UK home prices +1.9% YoY in November, beating expectations of +1.7%. What’s driving the Construction sector decline and are there any nuggets of gold in the muck? Let’s dig in and find out.

UK house prices may be growing faster than expected, but expectations are at their lowest since 2013, despite still highly accomodative borrowing costs and decent mortgage approval figures (+67.5K in October, beating forecasts). Because there is significant uncertainty in the months that lie ahead (i.e. Brexit) and the UK economy hasn’t quite picked up the pace as policymakers had expected. The key London market is also now growing below national average, hardest hit by Brexit sentiment.

Source: Nationwide Building Society, 30 Nov 18

And although house prices have risen in 2018, the pace of annual growth has slowed from an average +2.9% in 2017 to +2.2% in 2018. November’s 1.9% is the second slowest increase since March 2013, Oct ’18’s 1.6% being the worst.

Going forward, the numbers are unlikely to improve, with analysts at the EY ITEM economic forecasting group estimating average growth unchanged at 2% in 2019. And that still depends on a relatively smooth Brexit transition. If the government (and Bank of England) is be believed, a so-called disorderly Brexit could send house prices down 30% over the next 15 years.

Given this property market turbulence, it’s no wonder that Construction sector shares are all down, with the trio of big UK 100 Housebuilders, Persimmon, Taylor Wimpey and Barratt Developments, all trading fresh 2018 lows today (2-year lows in the case of Taylor Wimpey). On the mid-cap index , a similar picture presents itself for smaller housbuilders Bovis Homes, Bellway and Redrow.

Source: AlphaTerminal, 30 Nov 18

The coin has two sides, however. As long as dividend payouts hold, the yields on offer to new shareholders grow as share prices fall. As long as Housebuilders can preserve healthy cash flow (the housing market is still growing after all), their dividends should remain secure.

Housebuilders traditionally pay a hefty dividend to shareholders and, thanks to depressed share prices, their projected dividend yields are among the best on the UK Index . In fact, Persimmon (11.6%), Taylor Wimpey (11.4%) and Barratts (9.5%) have the highest dividend yields on the UK 100 after steelmaker Evraz (14.5%), offering significant renumeration to those looking to pick up these stocks at what could be considered more attractive valuations.

All three of the aforementioned Housebuilders reported solid recent trading results in mid-October and early November, each reiterating their forward guidance. This means the companies believe in a stable trading environment despite continued Brexit uncertainty and a murky outlook.

The question for investors is whether they believe in a smooth Brexit transition and if currently depressed Housebuilder share prices offer an exciting entry point, with the chance of a two-pronged benefit from juicy dividend yields and significant share price upside (all Housebuilder names down 28-35% from 2018 highs).

If you see an opportunity in UK Index Housebuilders and want to explore your investment options in more detail, get in touch with me and sign up for our award-winning research to get involved.

David Paradis, Trader, 30 November, 2018

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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.


Accendo Markets considers opinions and information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance.

Prepared by Michael van Dulken, Head of Research

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