Hugh Hendry has thrown his weight behind UK housing and said the sector is now undervalued with large headroom for growth.
In his latest market commentary, Hendry said he is ‘looking closer to home’ despite the global remit of his CF Eclectica Absolute Macro fund.
Focusing on UK housing, Hendry said there were several compelling reasons to back the sector despite analysts and experts adopting a more cautious view.
‘The good news for investors like us is that the UK is building far fewer houses than the growth in new household formations would dictate,’ Hendry said. ‘It is reckoned the UK needs about a quarter of a million housing starts annually. We are nowhere near that level.’
Hendry said local government-driven housebuilding remains minimal and the construction sector is less competitive but with potential for considerable consolidation among the bigger players, while smaller companies have diminished significantly.
‘The situation is even starker at the mom and pop segment of the market owing to the severity of the credit contraction from the banking sector in the aftermath of 2008. From 2008 to 2007, small and medium sized builders delivered about 38,000 houses annually; by 2013 this had fallen to just 14,000.’
With the changing shape of competition and the shortfall in housing starts, Hendry said any rebound already reflected in housing stock valuations was due to increases in house prices but not increases in house volumes, which is a key difference.
‘Prices may be back to the peak but mortgage approvals are still running at around half the peak level, and some 30% to 40% below the 10-year average preceding the crash,’ he said.
‘Indeed the transactions would need to rise 20% just to recover to the long-term average. And third, with prevailing low interest rates, mortgages nationwide are more affordable than they have been for most of the last decade.’
Coupled with this, Hendry said, is the UK government’s help-to-buy scheme for first-time buyers, which he viewed as the government effectively underwriting the housing cycle.
‘It is not fairy tale when we tell you that the shares within the sector are typically trading profitably on 12x earnings, yielding 4% and have the capacity to enhance this return with special dividends.’
‘Indeed, owing to the peculiarities of this enhanced cycle, one could possibly contend that this is not the time to be afraid of the big bad wolf.’
The CF Eclectica Absolute Macro fund returned 23.8% over the three years to the end of July 2015. This compares to a return of 6.8% by the average manager in the Alt Ucits – Global Macro sector over the same period.