According to analysts at Peel Hunt, the housebuilding sector remains on solid ground despite wobbles from political uncertainty, the so-called ground rent scandals and the question mark which hangs over the future of Help to Buy.
In its latest sector report, Peel Hunt said that the new build housing market has remained in decent shape over the last three to six months, while the second-hand market has remained subdued.
Sector share prices have largely followed this pattern, with the housebuilders up 5% in the last three months and estates agents down 2%. The last month has seen weak performances from both sub-sectors, down 4%.
Sizeable share sales by Tony Pidgley (Berkeley Group) and Steve Morgan (Redrow), have not helped recent sentiment, but the nervousness about the Brexit negotiations and the outcome of the reviews into Help to Buy (HTB) and Leaseholds have weighed more heavily, the research note said.
Help to Buy & Leasehold concerns overblown
Analysts said that concerns over Help To Buy and the leasehold issue have been overdone, and that the risk to the new build sector from both is modest. “We believe the government will make changes to the HTB scheme (with modest cuts to equity percentages and house price limits), but that it will be extended out beyond 2021, maybe as far as 2027,” it said.
“On leaseholds, we suspect the Government will adopt the Nationwide Building Society’s proposals of ground rents being set at no more than 0.1% of the selling price, and any increase must be RPI or less. If this was the case, the impact on the sector would be minimal, although we suspect old leaseholds with excessive inflators will need to be rectified.”
Housebuilders – no sign of margin pressures
Unlike previous cycles, land prices remain subdued due to the planning changes brought in by the government, analysts said. With house prices rising enough to offset the build cost pressures, the outlook for margins remains healthy.
While the government’s latest paper, “Planning for the right homes in the right places: consultation proposals”, makes sense, analysts at Peel Hunt suspect it will lead to extra pressure being put on housing output in London and the South East.
The report indicates that if this method is applied across all authorities, it would generate a housing need of 266,000 in England alone, with London accounting for 72,000 of this total.
The latest quarterly data for England shows c153,000 completions in the 12 months to May 2017, while London has produced 23- 24,000 units per annum in the last couple of years. This consultation is expected to lead to a revised National Planning Policy Framework (NPPF) being published in Spring 2018.
Target price increases and recommendation upgrades
Peel Hunt has upgraded its recommendations on Barratt (to Add from Hold), Countryside (to Buy from Add), Crest (to Buy from Add) and Taylor Wimpey (to Add from Hold). It retains Buy recommendations on Berkeley, Galliford# , McCarthy & Stone# , Redrow# , Telford# , Watkin Jones# and Purplebricks# .