Goodbye Labour mansion tax, hello Tory post-election property bonanza at Berkeley and Foxtons

International Business Times Video link (click below):

Goodbye Labour mansion tax, hello Tory post-election property bonanza at Berkeley and Foxtons 

Could property be the big gainer from David Cameron's election win? Estate agent Foxtons and house builder Berkeley Group jumped 9%+ on 8 May. But why?

Clearly, the stock market has heaved a huge sigh of relief at the demise of the Labour Party. Now there is no fear of a mansion tax hitting London housing.

This is good news for house buyers at the £2m ($3m, €2.7m) plus price bracket, such as foreign buyers in London, who have been holding off any purchases up until now.  

Equally well, with the risk of Labour's threatened rent controls now removed, the buy-to-let market could now see renewed activity.

Now that the Tories are in sole charge, they need to urgently tackle one of Britain's most pressing problems. London and the South East is the UK's economic heartbeat, but is desperately short of affordable housing.

House prices still on the rise – outside London

The Halifax house price index rose 1.6% between March and April, and 8.5% over the last year, for a yearly gain of nearly £20,000 on the average house (Figure 1).

Figure 1: UK house prices up by nearly £20,000 over the last year 

Source: Lloyds Bank

Last year, London properties saw the fastest-rising prices. In contrast, it is the rest of the UK that has enjoyed stronger house price momentum over these last 3 months.

According to the Royal Institute of Charted Surveyors (RICS), London is one of the very few regions where house prices have actually fallen over the last 3 months (Figure 2).

Figure 2: House prices rising fastest in Northern Ireland 

Source: Royal Institute of Chartered Surveyors

Four factors should drive a rebound in buy-to-let house purchases:

1. Lifting of the threat of rent controls;
2. High demand for rental properties (Figure 3);
3. Falling mortgage interest rates: The Co-Op Bank are now offering a new 2-year fixed-rate mortgage at only 1.09%. This suggests that the first sub-1% mortgage rate could soon be here.
4. Falling savings rates: your saved cash is worth less and less in the bank, increasing the attractions of alternative income investments. 

Figure 3: National rental demand remains very high 

Source: Royal Institute of Chartered Surveyors

All good for estate agents and house builders

What are the best ways to invest in the UK housing market? These are my two favourite housing-related industries:

Estate agents: Of course they buy and sell houses, and so make more money as house prices go up. But they also increasingly make money from the buy-to-let market, as they also act as letting agents.

House builders: who benefit from rising house prices as they can sell their newly-built homes for more, meaning higher profits.

My two favourite housing shares: Berkeley Group and LSL

I like the UK house builders as a group; they are all in general cheap, pay big dividends and are very profitable.

My favourite house builder is Berkeley Group (code BKG). It is focused on London and the South East of England, it is a generous income payer with a 6.4% dividend yield, and has been consistently very profitable over the last five years.

There are handful of listed estate agents in the UK. I like LSL Property Services (code LSL). LSL has two distinct sets of businesses:

• 539 estate agent branches under a number of brands, such as Your Move and Reeds Rains;
• Surveying and valuation services.

Both of these sets of businesses will make more money from a booming property market, whether from buying and selling or just from managing rented properties.

LSL is also a cheap stock and a reasonable income payer with a 3.7% yield; it is also consistently very profitable, with profits forecast to grow by 10% this year.

Post-election Friday was a good day for the estate agents and house builders; but there could be many more as the property market heats up again!

IB Times Article, Video: Barratt, Berkeley and Taylor Wimpey are safe bets for building returns

Please click on the web link below to read the original International Business Times article and watch the short video interview:

Barratt-berkeley-taylor-wimpey-are-safe-bets-building-returns

What should be the investors' mantra in 2015? I would vote for "Income, income, income", given the paltry interest rates on offer from bank and building society savings accounts. You can forget UK gilts (government bonds) as a source of income too, as a 10-year gilt only offers a pre-tax yield of 1.3% per year.

Within UK stocks, one of the most attractive homes for cash is your Isa (don't leave any Isa top-ups to the last minute in April) and any recently liberated private pension savings is in UK house builders such as Barratt Developments (code BDEV), Berkeley Group (BKG) and Taylor Wimpey (TW).

As a group, house builders such as these have enjoyed strong performance in share prices, gaining 20% since June of last year while the FTSE 100 index has struggled to remain flat (Figure 1).

Figure 1. House Builders Leave the FTSE 100 in the Dust

Source: Stockopedia.com

Yes house price inflation is slowing but prices are still rising

Unless you have been living on Mars these past few months, you will most likely be aware that UK house price inflation is slowing, with the Nationwide Building Society reporting a monthly gain in average prices of only 0.3% in January 2015, resulting in a yearly gain of 6.8% and driving the average price of a UK property up to a new all-time high of £188,446 (Figure 2).

Figure 2. House Prices Up 6.8% Over the Last 12 Months to £188,446 Average

Source: Nationwide

There are a number of economic factors that should support house prices over the year ahead, perhaps allowing for modest further house price inflation over 2015:

1. Lower unemployment (latest rate down to 6%) and improving wage growth (+1.6% year-on-year)
2. Lower energy costs on the back of lower petrol prices and lower utilities bills, boosting household discretionary income
3. Lower average mortgage interest rates as banks and building societies become more aggressive in chasing new mortgage and re-mortgaging business, with a two-year fixed rate for a 75% loan-to-value (LTV) mortgages heading down toward a new low of 2% (Figure 3).

Figure 3. UK Average Mortgage Rates Keep Falling 

Source: Bank of England

These economic and house price trends bode well for new build house prices for the remainder of 2015, with the latest Council of Mortgage Lenders' statistics highlighting a surge in first-time buyer mortgage borrowing, a healthy sign for the overall housing market.

Higher house prices herald higher profits

The surge in UK house prices has evidently been a boon for these house builders, with large house-building operations in the hot London and south east regions benefiting from higher prices for new build homes. These price gains have in turn driven higher levels of profitability for this group, reaching a historically elevated average of over 15% in 2014 (as measured by return on equity, Figure 4).

Figure 4. House Builders' Profitability Levels Hit Historic Highs 

Source: Stockopedia.com

Higher profits deliver delicious dividends

The direct result of this growth in house builders' profits is a bumper dividend crop for investors; this is a welcome income stream at a time when yield is becoming increasingly hard to find not only in the UK but indeed around the world.

Expected dividend yields this year range from a relatively lowly 2.6% in the case of Redrow to a very tempting 7.3% offered by Berkeley Group (BKG, Figure 5).

The house-building sector offers an average 5.3% dividend yield, which you can harvest without paying any tax if you buy the shares within a stocks and shares Isa.

Figure 5. House Builders Offer a 5.3% Average Dividend Yield 

Source: Stockopedia.com

All in all, I believe the bumper profits and premium dividend yields on offer from Barratt (BDEV), Berkeley (BKG) and Taylor Wimpey (TW) all merit a closer look for potential inclusion in an Isa or personal pension income portfolio. Why not delve into those delicious dividends?

With Foxtons in a Tailspin, Keep Your Finger Off the Housing Trigger

Here is my latest weekly article for IBT UK:

International Business Times Article link - Click Here

International Business Times Video Link

I have to admit, I did chuckle when I saw the profit warning lurking within Foxtons' recent results. I have long detested "flash" Foxtons, a London-centric estate agent chain with ultra-trendy offices and its distinctive green and yellow-liveried Minis.

It has been a big beneficiary of the recent London property price bubble. But now, it is beginning to display the hangover-like signs of "the morning after the night before", with housing transactions slowing sharply, sending Foxtons' top-line into a tailspin and its share price to 158.5p now, versus a peak of nearly 400p (Figure 1).

Figure 1: Foxtons down more than 50% from peak

According to the latest Royal Institute of Chartered Surveyors (RICS) market survey, surveyors are now expecting prices to fall in London and to decelerate elsewhere in the UK. Already, London buyer demand has fallen for the last five months in a row and new buyer enquiries have also collapsed.

So, are cracks finally appearing in the UK's housing boom? I should at this point declare a personal interest: my wife and parents have been badgering me to buy a pied-à-terre in London where I work for many months now. My protestations about how expensive and dangerous the London property market is have rung hollow as the capital's property prices have continued to climb month after month.

Earning income from buy-to-let in a zero interest rate world

With private sector rents increasing repeatedly by more than the rate of inflation, cash deposits earning virtually nothing in the bank and house prices enjoying a steady climb, the incentive to own your own home is clear. Vast swathes of people in this country swear by the mantra that house prices never go down over the long term.

So of course I see the argument for owning your own home, even if economists such as Danny Blanchflower and Andrew Oswald maintain high home ownership worsens labour mobility and thus represents a long-term drag on the economy.

It is where a buy-to-let housing investment is concerned that I have my objections. Yes, there are times when buying a flat or house to rent it out makes sense, typically when prices have fallen or have been stagnant for a number of years, throwing up value opportunities as we saw last in 2008-09 after a 20-30% drop in house prices nationwide.

Contrast that with the prevailing situation: house price inflation over the last five years has far outstripped both the general rate of inflation and also wage increases, making housing progressively less affordable to the average UK household even with two salaries. 

It is certainly difficult to call this value for money in a long-term context.

This is not to mention the myriad costs and risks a new buy-to-let investor faces, such as:

1. transaction costs, most importantly stamp duty when buying a property, 3% or more on properties worth over £250,000;
2. refurbishment costs, typically underestimated by new home buyers by £3,000 on average;
3. initial furnishing costs, if letting on a furnished basis;
4. the vacancy risk, where there is no rent coming in but costs to bear;
5. default risk, where the tenant does not pay rent owed on time but refuses to move out;
6. maintenance costs;
7. annual service charges and ground rent on leasehold flats;
8. managing agents' fees for finding tenants, higher if also managing the property;
9. income tax to pay on rents received (less allowable costs) and potentially capital gains tax too on gains when reselling the property hopefully at a higher price.

While this list is non-exhaustive, it is an important checklist for any budding buy-to-let investor to consider before bringing out the cheque book.

So when to buy? Not just yet...

A number of sources such as RICS, Hometrack and Nationwide point to slowing national price growth and outright price declines in London (Figure 2).

Figure 2: Have UK house prices peaked for now?

Add in a negative seasonal effect too - UK house prices grow much faster during spring and summer, and often fall back over winter. Given these facts, now is a good time to sit on your hands and let sellers sweat pushing up average discounts of achieved to asking prices, while spring 2015 could be a better time to find properties at more reasonable prices, especially in and around London.

Edmund

UK Housing Becoming a Buyers' Market? Not good for estate agents...

The UK media has not tired of bombarding readers with news stories about the runaway nature of the London property market in particular, and the UK housing market in general, this year. As I have been looking to buy a bolt-hole in London, this strong price momentum has been particularly annoying, with properties literally flying off the shelves soon after being put up for sale.


This trend looks finally to be on the turn, despite continued reports of London seeing 19% price growth in the year to July, according to the Office for National Statistics. 

RICS Survey Points to Big Slowdown

The Royal Institute of Chartered Surveyors' latest monthly survey for August highlights this London slowdown in a number of revealing charts (Figures 1-3):

1. Newly Agreed Sales Are Slowing Fast

2. New Buyers Are Cooling Their Interest Given High Prices

3. Particularly in London

European House Prices Hardly Advance

While UK house prices have gained 12% in the year to July, the latest Knight Frank Global House Price Survey reveals that European house prices overall have only gained 2% over the last 12 months, with certain markets such as Spain still seeing falling prices.  In fact in Europe, only Turkey (+14%) and Ireland (+12.5%) have seen faster house price growth than the UK. But remember, in the case of Ireland, that this rebound in house prices has only come after a terrible 50%+ fall in house prices during the Global Financial Crisis, a far cry from the UK situation today. 

Can we really expect the UK housing market to continue to march upwards, even as affordability ratios deteriorate rapidly and force ever more 20- and 30-year olds live at home for longer in order to try to save up a deposit? And what if the Bank of England decides to begin raising its base rate, even if only gently? This could have a further negative impact on affordability to add to this price growth. 

Seasonal Effects: Q4 is the Weakest Period of the Year for House Prices

I have looked at the quarterly variation in UK house prices from the Nationwide house price index going back to 1952: From this, it is quite clear that Q4 (October-December) is the weakest of the year from the point of view of house price momentum (Figure 4): 

4. Q4 is on Average 0.7% Below Year Average House Price Growth

If we delve deeper and look by month using the Halifax House Price index data back to 1983, we see an even more obvious seasonal effect with August-January registering average house price growth well below the overall long-term average (Figure 5), with a similar if not exactly the same seasonal effect also found in Rightmove monthly asking prices (going back to 2001, Figure 6): 

5. August-January Sees Pronounced Seasonal Weakness in House Prices

6. Rightmove Asking Prices Also See A Weak August-January Trend

Two Conclusions To Reach

1. With discounts of achieved to asking prices currently widening according to Hometrack, it is time for homebuyers, especially in the pricier London and the South East regions, to be more discerning and to bid lower, particularly if a cash or non-chain buyer and thus able to complete relatively quickly.
   
   
2. Estate agents like Foxtons (FOXT.L) and online property listing websites like Rightmove (RMV.L) and the recently-listed Zoopla (ZPLA.L) should see their premium valuations come under further attack as top-line growth inevitably slows along with overall housing market activity. I see a forward P/E of 22x for Rightmove and 27x for Zoopla as far too high when their core market is slowing, particularly as their dominance and cost to estate agents is spawning rivals like Agents' Mutual. Even estate agents are seeing their percentage-based fee structure under attack from fast-growing online estate agents charging a flat fee (e.g. £500) such as sellmyhome.co.uk. Rightmove and Zoopla could thus be interesting short candidates...

There will be a Time when Estate Agents Are Interesting Stocks

There will inevitably be a time to look at estate agents such as Foxtons and LSL Property Services (LSL.L), but I feel that this will be when they trade on single-digit P/Es and dividend yields of well above 5%. Foxtons may have nearly halved from its post-IPO high but has not hit these valuation levels yet, while LSL is not far away (9.8x forcast P/E and 4.9% dividend yield according to Stockopedia) and may warrant further attention in the months ahead. 

But for the moment, I shall be biding my time and keeping a close eye on house price developments, in the hope of buying either a London property in the months ahead, or at least snapping up the shares of a bargain basement estate agent!

Edmund

Still time to climb on the housebuilders’ ladder

Surely UK house builders have done so well already, that they can’t possibly have much further to go? When the heated state of the UK housing market becomes headline news on a regular basis, then as a stock investor, you have to be worried, right?

While that might normally make sense, in this case I would beg to differ. It is true that, since I wrote my last article extolling the virtues of UK house builders on February 4 (UK Building is All Systems Go!), the Bloomberg UK house builders’ index has risen some 9%, its pullback today notwithstanding.

But let me present a series of data that I find to be compelling evidence that the current bull market in housing-related stocks  still has some way to run…

Item 1: House Builders have 37% to go to Reach their 2007 Highs

Yes it is true! As a group, house builders like Barratt Developments (BDEV), Berkeley Group (BKG) and Persimmon (PSN) have 37% further to rise before they hit their June 2007 share price highs.

Item 2: Housing Starts Are Picking Up, But Still Below Average 

House builders are breaking ground on more new projects today than at any time since the first quarter of 2008. However they are still a long way from climbing back to the average for quarterly housing starts seen pre-Financial Crisis. 

Item 3: and Building Completions Are Even Worse…

If we look at the rate of building completions in the UK, the situation looks even worse...

Item 4: Mortgage Approvals Go Up, Mortgage Rates Down

And all the while, the UK Government is of course doing its bit to help the purchasing of new-build homes with their Help to Buy schemes, effectively guaranteeing the first 20% of a 95% loan-to-value mortgage, allowing first-time buyers to get on the property ladder with only a 5% deposit. No wonder then that the number of mortgage approvals is going up!

To read on, see the charts and see my favoured stocks for this theme,
click on this web link: 

Still time-to climb on the housebuilders' ladder

View my CNBC WorldWide Exchange TV interview!

Here is the video link to to my CNBC Worldwide Exchange interview from this morning:

CNBC Worldwide Exchange: Favoured Sectors

Click on it and have a look!

Best,
Edmund

On CNBC Europe this morning - my preferred sectors...

I went on CNBC Europe's WorldWide Exchange programme this mornign to talk about company results and my favourite sectors. What are they? Well:

1. UK housebuilders - like Inland Homes (INL), Barratt Developments (BDEV) and Telford Homes (TEF). Note the strong results this morning from builders' merchants Travis Perkins (TPK), helped by the strong UK housing market, together with the Government's aid from the Help 2 Buy programmes.
   
2. Technology stocks, in particular semiconductors - Infineon (IFX in Germany) and Sandisk (SNDK in the US) would be two good plays here; cash-rich and benefiting from the "Internet of Things" theme.
   
3. Mining stocks, which are cheap and recently posted good Q4 results: in the short run, they will be driven by sentiment over Chinese growth, but I still like Rio Tinto (RIO) and Anglo American (AAL) in the medium-term. 

While stock markets had a very strong 2013 and have bounced back to new highs this year, I see further positive momentum ahead as economic momentum picks up in the Eurozone, and recovers from a short-term dip in the US and China. 

UK Building is All Systems Go! Stocks to play the theme

Highest UK Construction Confidence in 10 years

If ever anyone needed confirmation that the UK building industry is enjoying the best of times, you only need to look at the record level of UK construction confidence registered this morning in the Markit UK Construction PMI survey - a reading of over 65, confounding analysts' expectations for a fall in confidence. 

Unsurprisingly, residential construction is leading the way, given the buoyant state of house prices nationwide, but most of all in London. You only have to look around London to see the amount of regeneration that is going on, even after the 2012 Olympic Games, for instance in the North and the East End of London.

To see charts and UK stock suggestions to play this strong construction momentum, please click on the Mindful Money website link below:

UK-building-is-all-systems-go

This is one of my personal favourite investment themes of the moment in the UK, as I feel there is quite a bit further to run in the UK's economic renaissance, with the property market crying out for new builds to alleviate the current shortage of housing supply in London and the South East. 

Edmund