UK housebuilders stage rebound amid murky outlook for property market

THE Thameside area of Barnes, with its village atmosphere, attractive period properties, good schools and proximity to central London, was recently named as London’s second-best place to live in The Sunday Times’ Best Places to Live Guide, after Fitzrovia.

These positive factors for sale­ability would undoubtedly have contributed to high-end housebuilder Berkeley Group’s decision to develop a £20 million (RM108 million) project. The four-storey luxury townhouses in this southwest London enclave were expected to sell for up to £5 million each, according to a Reuters report.

Thus, the developer’s recent announcement that it is halting construction mid-build — basements and ground floors have already been built — without any official explanation has been met with some concern by market observers, who described it as a rare and unusual move. It has also prompted speculation that the decision is Brexit-related.

The announcement follows news days earlier that Berkeley would be relegated from the FTSE 100 share index this month, owing to the 20% fall in its share price since the June 23 referendum to leave the European Union (EU). The Daily Telegraph described the London-focused housebuilder as being one of the hardest hit when investors sold down on the housebuilding sector following the vote, amid fears of a Brexit-linked economic slowdown affecting UK housing demand, particularly in London’s luxury sector.

In an AGM trading statement released recently, however, Berkeley has reassured investors that it is on track to achieve its £2 billion pre-tax profit target by end-April 2018, owing to strong forward sales. This is despite a 20% fall in reservations for its properties between May 1 and Aug 31 compared with the same period last year, which has been attributed to reduced supply of its products as well as broader market conditions that include stamp duty changes and the EU referendum.

Such assurances from Berkeley and other housebuilders would help calm investors spooked by the likelihood of continued economic uncertainty, as the UK government takes its time to work out its next steps following the country’s momentous referendum.

The construction sector remains dampened after a post-referendum slump; while the Markit/Chartered Institute of Purchasing and Supply Construction Purchasing Managers’ Index has bounced back from a seven-year low of 45.9 in July to 49.2 in August, it is still below the 50 level that distinguishes growth from contraction. Markit senior economist Tim Moore has expressed hope that the stabilising market is a sign that the short-term fallout from the referendum will be less severe than feared.

Such cautious optimism has also been fuelled by recent news that UK house prices had picked up marginally in August. Figures from mortgage lender Nationwide show that the average house price rose 0.6% between July and August, while the annual rate went up from 5.2% to 5.6%.

This data, however, seems to contradict other indicators that the housing market is slowing down. According to Bank of England figures, the number of new mortgage approvals had fallen to an 18-month low in July. Meanwhile, the Royal Institution of Chartered Surveyors’ widely followed Residential Market Survey posted its lowest reading of UK house price growth in three years in July.

The conflicting picture is being attributed to what Nationwide describes as a “weakness in supply”: The stock of properties on sale is reportedly close to a 30-year low, hence the recorded house price growth. But not everything is necessarily attributable to the “Brexit effect”, as Berkeley made clear when it criticised government housing policy for having a negative effect on London despite being effective outside the capital.

In its trading statement, the housebuilder said “too high” transaction taxes such as stamp duty hikes and the Community Infrastructure Levy, a planning charge imposed on developers, were threatening “development via­bility” and hence the supply of new homes in London and southeast Eng­land. It is an argument that is supported by rival firm Redrow, whose CEO John Tutte recently contended that stamp duty hikes have “devastated” the high-end housing market and this could have further repercussions on the rest of the UK property sector.

Redrow and one of the UK’s biggest housing developers, Barratt Developments, have asserted that their businesses have been relatively unaffected by the Brexit vote, recently announcing strong profit figures from good forward order books and completion rates. Both companies have expressed confidence in the UK housing sector and their businesses. It bears noting, however, that unlike Berkeley, they are less concentrated on the London property market, which is expected to bear the brunt of the Brexit effect.

But even as such news has restored investor confidence in housebuilding stocks, whose values plunged by as much as 40% immediately after the Brexit vote, the outlook for the UK housing market remains murky.

Market observers say a lot will depend on how the UK economy reacts following the shock referendum result. An increasing number of investment banks, including Goldman Sachs, JP Morgan, Morgan Stanley and Credit Suisse, have now revised upwards their outlook for the UK economy in the face of better-than-expected growth recorded in the UK’s dominant services sector in August. Many are now hopeful that the UK will avoid a post-Brexit recession, and this can only bode well for its housing and construction sectors as well as for the country as a whole.

Lim Yin Foong was founding editor of Personal Money, a Malaysian personal finance magazine that was published by The Edge Communications. She is currently based in the UK.

This article first appeared in The Edge Malaysia on Sept 12, 2016. Subscribe here for your personal copy.