Paul Stephany, manager of Newton UK Opportunities, outlines his bearish outlook on UK property and why he is underweight the sector.
The UK stock market is telling us the property boom is over and where property goes, consumer confidence generally follows, according to Paul Stephany, manager of Newton UK Opportunities. He believes Foxtons’ analyst downgrade in late August is a “harbinger of doom” for the property market. Last month the mid-cap company reported it expected to see a slowdown in the rate of property transactions in the second half of the year, due to government measures aimed at controlling mortgage lending. The property group also reported that expectations of an increase in interest rates were already having an impact on short-term demand.
On the surface, the pricing of housebuilders may look reasonable at the P/E range of 8-11x but Stephany pointed out their business structure means they can be considered expensive at this level. “Housebuilders need to recreate their businesses every 10 years or so, buying land to refresh their portfolios and they have limited idea of the costs this may involve down the road.”
Stephany has been bearish on the UK housing market for some time and believes it will weaken over the second half of the year, which could negatively impact the wider UK stock market. “London property prices have led the market up - they may just lead us down as well.”
The manager, like many of his colleagues at Newton, believes government initiatives, such as those that have encouraged banks to lend and kept interest rates low, have distorted the whole stock market. As such, he said, he is wary of taking too large a bet in areas like housing, retail and smaller companies. Although the mid-cap weighting has been increased since Stephany took over as manager of UK Opportunities 18 months ago, it is around 30% of the portfolio. “We prefer to buy unloved areas and avoid consensual trades like housebuilders.”
That said, he does own one property company, Derwent London, a central London-focused real estate investment trust. However, he said his 2% holding in the company is more a technology than property play. “Due to where its portfolio is located, it is a huge beneficiary of the tech boom in London, one of the biggest contributors of job growth in the area. Where jobs are needed, property space is in demand as companies grow.”
Although the technology position in UK Opportunities looks low at under 2%, Stephany commented he has exposure to the sector through tech-related stocks that sit in other FTSE sectors. For example, he recently participated in the IPO of retail stock Just Eat, a take-away website, while he has held financials company Plus500, an online brokerage, since its IPO. He also owns comparison site, Moneysupermarket. “In reality we have around 15% in tech.”
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