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Jeremy Lang: The 'goldilocks' housebuilder recovery has legs
by Danielle Levy on May 14, 2014 at 12:52
Ardevora UK Income manager Jeremy Lang believes housebuilders have even further to go, and views concerns about a potential house prices bubble are overstated.
As positive results from housebuilders Persimmon and Barratt Developments led the FTSE 100 to a 14 year high on Tuesday, Citywire AA-rated Lang points to the cautious approach many of the leading housebuilders are taking, which he says leaves them well positioned as they look to the future. In his view, it is problematic to use previous cycles as a point of comparison.
'The problem with past cycles was that housebuilders quickly ramped up land purchases to chase growth, and drove land prices up just as fast – or faster – than house prices. This is not happening at the moment because these companies are all behaving cautiously,' he said.
He believes part of the problem lies with swings in sentiment as the UK recovery gathers speed, and he branded the recovery a 'goldilocks' scenario.
'We are playing this goldilocks consumer recovery in the UK. If it is too cold everyone panics, while people get concerned about a rise in rates if it is too warm. But this is how recoveries usually play out in our view, with many swings in sentiment. While everyone fixates on periods of too hot and too cold, the recovered just continues to move along.
'At the moment there is plenty of anxiety about the housebuilders, largely because of the rises we have seen in house prices. People are concerned about another boom and bust scenario. However, transaction volumes are very low at the moment, which is not what you would see in a traditional ‘boom’. This tells you the UK is supply constrained. This is why the house builders are in a good place structurally,' Lang said.Lang and co-manager William Pattisson, also AA-rated, own Barratt Developments, Persimmon, Taylor Wimpey and Bovis Homes. Having first bought Barratt two years ago when the business had significant debt on its balance sheet, Lang is encouraged that the company has now paid off all of its borrowings.
'It is an incredible transformation, as the company was on its knees only a few years earlier. If you have a near death experience, if makes you incredibly cautious for as long as you remember the near death experience,' the fund manager said.
'We view Taylor Wimpey as a less extreme version of Barratt. It seriously overstretched going into the last recession, but did not get into quite as much trouble as Barratt. Like the others, it worked through its expensive land after 2008, generating cash to survive, and then replenished with much cheaper land as finances improved.'
Lang notes that Taylor Wimpey on the other hand has benefited from rising house prices by locking in higher margins on the houses it is building and selling. 'These higher margins translate into better free cash flow, higher dividends and better returns for shareholders,' he added.
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- Persimmon PLC (PSN.L)
- Barratt Developments PLC (BDEV.L)
- Taylor Wimpey PLC (TW.L)
- Bovis Homes Group PLC (BVS.L)