Housebuilders’ sentiment is a key component of overall confidence in the property market. While economic growth is a key determinant of housing demand and many indicators point to a short-term slowdown in the overall UK economy, there are some tailwinds.
House-building activity has shown a strong increase over the past two years, boosted in part by changes to the "office to residential Permitted Development right". Planning permission for new homes has been increasing and is now just short of the pre-crash peak in March 2008, according to the House Builder Federation (HBF) and consultants, Glenigan. While there may be some time lags before builders can start building, the figures are a strong indicator of future supply.
In our view, UK housebuilders are on a much more secure footing than they were in 2008, when they last suffered a similar rout. They have maintained discipline in paying out significant dividends, have held healthy reserves on their balance sheets and have not tried to expand too rapidly during the good times. All the major house builders have large land banks which were largely bought at low prices and we believe margins should survive a period of lower prices.
We see other economic fundamentals also providing support for UK housebuilders. After more than seven years at 0.5%, the UK base rate was cut to a new historic low of 0.25% in early August. This islikely to mean lower borrowing costs for developers and lower mortgage rates for buyers. On the flip side, near-zero deposit rates and Consumer Price Index (CPI) annual inflation at 0.6%, and rising, means that investors who keep their money in cash look likely to lose in real (inflation-adjusted) terms. We think they may look to other asset classes, including property, for inflation-beating returns.
Phil Hooper, Head of Housing at RBS Real Estate Finance believes the fundamentals of the mainstream UK housing market remain strong despite political and economic uncertainties. “The larger house builders have been the driving force behind a steady increase in completions over the last five years, and this growth is both measured and sustainable” Hooper said. However, he did note disappointment at the lack of smaller new developers entering the market, putting this down to “the time it takes to delivery a site through planning to completion and the capital investment required to match it.”
If you require further information regarding the residential real estate service we offer, please contact Katherine O'Shea.
Issued by Adam & Company Investment Management Limited (Adam), which is authorised and regulated by the Financial Conduct Authority. Adam is registered in Scotland number SC102144. Financial Services Firm Reference Number 141831. Registered Office: 6-8 George Street, Edinburgh EH2 2PF.
The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance should not be taken as a guide to future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down.
The information on this webpage is not intended as an offer or solicitation to buy or sell securities or any other investment or banking product, nor does it constitute a personal recommendation. The information is believed to be correct but cannot be guaranteed.
Any opinion or forecast constitutes our judgement as at the date of issue and is subject to change without notice. Nothing in this material constitutes investment, legal, credit, accounting or tax advice, or a representation that any investment or strategy is suitable for or appropriate to your individual circumstances. The analysis contained within this webpage has been procured, and may have been acted upon, by Adam and connected companies for their own purposes, and the results are being made available to you on this understanding. To the extent permitted by law and without being inconsistent with any applicable regulation, neither Adam nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such analysis.