JP Morgan analysts show confidence in housebuilders

August 18, 2016 / Isla MacFarlane
JP Morgan analysts show confidence in housebuilders

In a recent broker’s note, JP Morgan Cavezone said there appears to have been little to no impact from Brexit on new build demand; this is in contrast to the RICS survey which suggests the housing market has slowed in all regions.

According to JP Morgan Cavezone, house price deflation less likely than valuations imply. “The housebuilders are down c.25% post-EU referendum,” analysts said. “At this point we believe the sector is pricing in a c.5% house price decline UK-wide. However, while we think it’s prudent to assume that transaction numbers will fall during 2017 (although trends have been solid so far), we see no warning signs that house prices are likely to decline UK-wide.”

“We’re yet to see any signs of a market slowdown post Brexit,” it said. “As yet, weaker consumer confidence readings in July haven’t been reflected in demand for new housing; companies reporting so far experienced normal July trends (with the exception of Central London, which was already very slow). The limited data available suggests that this represents at least small outperformance vs. demand for existing home, something that has been a feature of the sector since the introduction of Help to Buy.

“Long order books and a good current market trends mean that we see little scope for companies to miss on 2016 earnings. However, we still believe it is prudent to expect weaker economic conditions to impact demand for housing in 2017. We now assume that sales rates decline by c.10% in CY17 and HPI drops to zero, for both 2017 and 2018, rather than +2%.

“Implicitly, we are assuming that housing transactions are down 15-20%, given that we expect new build to take share in a slower market. We assume that build costs broadly follow, on the basis that labour inflation is likely to soften with demand.”

“Balance sheet strength and the working capital cycle mean that we see little to no risk to dividends, in all by the most extreme of downturns: We expect companies to be increasingly cash generative through a downturn, given that land purchases and WIP balances are likely to decline (so far we have already seen some prudence on land purchases).

“Given that most companies start in a net cash position, we see dividend payouts as sustainable in all but the most extreme downturns, with the highest payout stocks most likely in our view, to be able to maintain payments.”

London appears to be analysts’ only concern. “While the majority of housebuilders have some exposure to London, sites tend to be weighted towards outer London,” it said. “In the main, Central London land price inflation was extremely high in 2014-2015, and housebuilders struggled to acquire sites that met their returns metrics. Bids for new sites tended to be won by smaller land developers, often from overseas.

“The listed housebuilders have looked further out of London into affordable areas of transport Zones 2 and 3. While we are slightly bearish on the outlook for outer London, given that high price rises have been concentrated on Central London, we are fundamentally less bearish on outer London. Outer London sites often provide more scope for gains.

“Housebuilders started to talk about the land market in central London becoming tougher from 2013/4 onwards. Anecdotally, land prices were thought to be outstripping house prices and house builders reported that they were usually failing to win bids on new land.

“Land buying activity from the housebuilders in Central London has been slow for several years. Berkeley, for instance, has only purchased three sites in travel zone 1 since April 2013, vs. 11 the four years before that. Where Berkeley has acquired central sites in recent years, management has commented that the terms have been particularly good, either because the group has made material planning gains, or benefited from having available funding and therefore transacting quickly where others have failed to do so.”

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