Interactive Investor

Why housebuilders are off the boil

14th October 2016 13:21

Lee Wild from interactive investor

Share prices have soared Friday, led by Tesco, Man Group and the miners, at least partially repairing the damage done by a three-day sell-off this week. However, gains would have been more impressive but for grim construction data, which has demolished the housebuilders.

According to the Office for National Statistics (ONS), construction output fell by 1.5% in August from July, much worse than forecasts for 0.2% growth. We're told not to read too much into one month's data, but even the three-month number shows a decrease of 1.3% from the previous period.

It's hardly panic stations, but shares in both Countrywide and Crest Nicholson have fallen 1.5% Friday, and there are losses at Galliford Try, Bovis Homes, Taylor Wimpey and Bellway. Only Persimmon and Barratt Developments are better.

All are still way above their post-referendum lows, true, but momentum has clearly been lost from the recovery in recent weeks.

And that's despite the latest RICS survey which showed a further rebound in activity following the summer lull. The buyer enquiries balance swung from -4.8 in August to +8.3 last month and both sales and price expectations increased in September.

"The recovery in the survey is not unexpected, in our view, and reflects the uncertain environment in the run-up to and post the EU referendum in June, with conditions having now shown signs of normalising," explains broker UBS.

The decline in ONS construction data was driven largely by a 5.1% dive in historically volatile infrastructure output, which had actually risen by 6.1% the month before. The annual figure shows a decline of 9.3%, the sixth consecutive month of year-on-year decreases.

But ONS senior statistician Kate Davies points out that the monthly construction data can be "quite erratic", adding: "As the fall this month is led by infrastructure, it seems unlikely that post-referendum uncertainties are having an impact."

And UBS still believes UK housebuilders "look attractive" given general net cash balance sheets. Still down around 20% since June, the sector trades on 1.4 times price/tangible net asset value (P/TNAV) on 2017 estimates, a price/earnings (PE) ratio of 7.4 times, and dividend yield of 7%.

"Trading patterns since the referendum show sales rates up c3% year-on-year for the sector average, despite the tough comparison basis from 2015," says UBS. "The secondary market indicators have generally been weaker, which we believe in part likely reflects changes in stamp duty legislation. The RICS survey reflects the secondary market and suggests some sequential improvement in this regard."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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