Piecing Together the UK Property Puzzle

Perhaps the UK property market will go the way of the US, where there is a separate market for each state, thus giving a true and accurate reflection of local markets. This, of course, comes with its own challenges – the housing market is vital to the US economy, so how to measure it without resorting to averages? Perhaps that is a topic for another day.

Bubbles or not, the outlook for the building and construction sector is a truly global, and largely promising, phenomenon.

In July 2013, research firms Global Construction Perspectives and Oxford Economics published Global Construction 2025, a study which reported that “the global construction industry is set to see growth of 4.3% pa until 2025, concentrated primarily in emerging economies.” That equates to a rise in construction output from US$8.7tn in 2012 to US$15 trillion by 2025, and a share of global GDP of 13.5%.

This is to be underpinned by a United Nations forecast of a growth in the global population to 9bn people over the next 40 years from the current 7.2bn: “The population in Africa is anticipated to double over the next 40 years and India will likely become the world’s most populous country with over 1.5bn people alone.” The majority of that growth is projected to be in urban environments.

Meanwhile, a recent report undertaken by PricewaterhouseCoopers described the state of merger & acquisition activity for the second quarter of 2014 in the engineering and construction sector as having risen to US$67bn from US$15bn in the previous quarter, with the number of transactions up by 18%.

This surge was driven in particular by two mega deals – the US$29bn merger in Europe between Holcim and Lafarge and the acquisition of Alstom’s energy unit by General Electric in a deal valued at US$17bn. However, it also served to highlight a number of trends currently evident within the sector, such as consolidation in the industry being driven by generally improving economic conditions and an effort to minimise costs and improve efficiency. In addition, the GE/Alstom deal, where the latter had a presence in Asia and Africa, gave GE a “passport” into those regions.

Underpinning all of this, of course, is a historically low interest rate environment where the cost of borrowing is low and within an easy monetary policy backdrop which has tended to push up equity prices, company profits and the sentiment of boards in general in equal measure.

The UK Market

The previously referenced “Global Construction 2025” report forecast growth for the UK, if not Europe in general in the years to come. Specifically it referred to the pressing need for new homes and renewed infrastructure in the UK, with a seemingly healthy appetite coming from Chinese and Middle Eastern sovereign wealth funds to invest in this expansion. The report therefore saw UK construction output growth of 2.1% pa through 2025, twice the western European average, with the size of the UK market rivalling that of Germany at the end of the period (US$315bn and US$342bn respectively).

In the recent past there have been some interesting shifts also.

For example, within the construction sector, companies such as Carillion are moving or have moved into support services in an effort to reduce earnings volatility, particularly given the inherently cyclical nature of the business.

In addition, a recent report in the Financial Times cited a release by the Construction Products Association, highlighting a “lost decade” whereby the 2007 building peak will not re-establish itself until 2017, with the interim loss of 337,000 jobs, a number of smaller operators going bust and (for example) the cancellation of a £55bn school building project in 2010. Even so, the CPA predicted a 23% growth in the four years to 2018 in the commercial construction sector, with London and the South East driving a revival (such as Crossrail and Thameslink London) expected to fan out to the regions in the next few years.

Meanwhile, Taylor Wimpey previously sold off its construction business to become a less “volatile” housebuilder. The housebuilders themselves have benefited both from government initiatives to ignite the sector (apart from the more obvious interest rate policy, there have been the likes of the Help to Buy scheme), alongside which the financial crisis of a few years back gave them somewhat unique opportunities – the chance to see some competitors go by the wayside, the purchase of land at lower prices given the general lack of confidence, and the motivation to clean up their balance sheets to the extent that they are beginning to reap the rewards.

The table below is a typical selection of property related stocks within the FTSE100. This in itself is a sign of the times, with the likes of Persimmon and Barratt Developments having regained their FTSE100 status having been relegated to the FTSE250 at the height of the financial crisis.

As can be seen, these shares have had a particularly good run of late, with the market consensus remaining generally undeterred for future prospects, despite the strength of these rises.

 

 

Current price
(26.8.14)

Share price
performance 1 year

Dividend
yield (%)

Market
capitalisation (£ billion)

Market
consensus

British Land

725p

+27%

3.7

7.3

Strong buy

Land Securities

1085p

+23%

2.8

8.6

Strong hold

Barratt Developments

372p

+20%

0.7

3.7

Strong buy

Persimmon

1350p

+18%

** see below

4.1

Cautious buy

FTSE100

6806

+5%

3.4

N/A

N/A

** Persimmon – currently in the midst of a £1.9bn, 620 per share “Capital Return Plan,” lasting until 2021. So far there have been two payments of 75p (June 2013) and 70p (July 2014) with the next payment of 95p due in July 2015. As such, these “special” payments do not factor in to the usual dividend yield figures quoted. (For further information the remaining six payments – July 2016 to July 2021 – are currently planned to be 10p, 110p, 10p, 110p, 115p and 25p).

The companies themselves are remaining upbeat on prospects also. At their most recent trading updates to the market, the management of British Land noted that “We’ve had a good start to our new financial year. The occupational and investment markets in London and retail continue to strengthen, while our own actions are also driving a strong performance”, whilst at Barratt Developments the war cry was “We are positive on the outlook for the group and expect to deliver a further significant improvement in performance in the full year 2015. We are forecast to open around 180 sites in the year with attractive new developments across all regions.”

Full research notes are available on each of the above stocks at http://www.hl.co.uk/

 

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