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Bullish brokers say buy builders after Budget

Fund managers and analysts say yesterday's sell-off was overdone and argue builders could even benefit from 'land banking' crackdown.

 
Bullish brokers say buy builders after Budget
 

Fund managers and analysts have seized on yesterday's slump in the shares of house builders following the Budget as a buying opportunity for investors.

Shares in FTSE 100 house builders fell yesterday on news of chancellor Philip Hammond's clampdown on 'land banking', where house builders snap up planning permissions but fail to start building.

But they have recovered much of that ground today, as analysts and fund managers lined up to deliver the bull case for builders.

Most see little threat from the government's land banking crackdown, with analysts at both Liberum and Jefferies highlighting that the government was going over all ground, with previous reviews having found little evidence of land hoarding by builders.

Liberum analyst Charlie Campbell pointed to 2004's Barker Review and the 2008 Competition Commission review into the practice, both of which found little evidence house builders were at fault.

Jefferies analyst Anthony Codling said launch of the review showed that 'history teaches us nothing'.

'Every previous inquisition has found that land banking is a myth, and we suspect that this one will too; we suspect this will be confirmed in the Spring Statement in 2018.'

Fund managers bullish

Anthony Lynch, who holds a variety of stocks from the sector in his JPM UK Equity Core fund, was equally confident builders were at little risk from the review.

'House builders are clearly incentivised to build out volume on sites where the demand is there and indeed such a review could highlight to the government the labour skills shortage that is currently the main constraint on volume growth,' he said.

Stephen Bailey, another big backer of the sector in his Liontrust Macro Equity Income and Macro UK Growth funds, said investors' demand for dividends was acting as a natural brake on land banking.

'While this practice does act as a friction in the property market, its prevalance has actually been on the decline,' he said.

'Land banks have levelled off over the last few years as house builders increasingly look to return excess capital to shareholders rather than allow it to be tied up in undeveloped sites.'

Campbell added the review could even prove beneficial to builders, should it focus on what he argued was the real problem.

'We believe that the blame lies with private land owners, the understaffing of local authority planning departments, and lengthy pre-commencement conditions imposed by local authorities,' he said.

'If these conclusions are shared by the review, it may be good for the industry, if remedies enable prompter starts on sites.'

Glynis Johnson at Deutsche Bank agreed. 'We believe this review may instead provide an additional push to local authorities to speed the planning process, and also to increase the supply of land available to the large house builders as the land promoters become more active sellers of their land,' she said.

Johnson argued this could provide a boost to builders by 'helping to underpin further years of land buying at a similar, if not better, margin than currently available, driving not just greater longevity of the strong return on capital employed, but also potentially further improvement'.

Stocks in line for stamp duty boost

Hammond's flagship policy in yesterday's Budget was the scrapping of stamp duty for first-time buyers purchasing a property worth up to £300,000, or on the first £300,000 of properties worth up to £500,000.

But Codling argued the move was unlikely to have a big effect on the housing market. 

'While a stamp duty cut is welcome news for first-time buyers, it will do little, in our view, to give a leg up to those looking to gain a foothold on the housing ladder,' he said.

'We estimate that the average first-time buyers spends around £165,000 on their first home. The stamp duty cut will save them £800. Stamp duty is not, in our view, the barrier to home ownership; deposits are.'

Johnson agreed the move would do little to remedy the challenges for first-time buyers, but said it could benefit some house builders by injecting further liquidity and demand.

However, the property price limit on the policy means it is likely to be most helpful to those selling homes at lower prices, unlike high-end builders like Berkeley (BKGH).

She suggested retirement house builder McCarthy & Stone (MCS) as a likely beneficiary, given 90% of the company's customers are trading down from homes worth less than £500,000.

Campbell suggested Persimmon (PSN) as a particular beneficiary, but said the boost to affordable house builder MJ Gleeson (GLEG) would be limited by the fact that 'only half its customers were paying stamp duty anyway'.

Both Lynch and Bailey also pointed to building materials stocks as potential beneficiary's from the Budget's focus on housing. 

They pointed to brick makers Forterra (FORT) and Ibstock (IBST), with Bailey also highlighting landscaping materials company Marshalls (MSLH) and Lynch citing plastic pipe manufacturer Polypipe (PLP).

1 comment so far. Why not have your say?

Hank Elvis Dobbs (texan)

Nov 23, 2017 at 17:21

'they've' been reading my script.....unbelievable

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