Market Commentary - Housing, Infrastructure, Construction and Services 6th January 2017
There is no directly relevant news this morning from sector companies.The positive news from Persimmon yesterday gave a boost to the all of housebuilders and its stock rose 7%. There is a lot of activity in the social housing arena that is worthy of attention. Subsidies into the housing sector are increasing and will impact further on quoted stocks
There is no directly relevant news this morning from sector companies.
The positive news from Persimmon yesterday gave a boost to the all of housebuilders and its stock rose 7%. No surprise therefore that Galliford Try was the leader in our universe, rising 3.6% as over 80% of its operating profit arises from housebuilding. The positive news from Persimmon also impacted favourably on the Merchants and Grafton and Travis Perkins also rose by more than 3%. We expect that updates next week, most notably from Taylor Wimpey will be similar to the news from Persimmon but the impact may already have been seen. Losers yesterday include Compass, down 0.8% to 1461p which is not significant in our view; it had risen in early trading sessions this week as the $ strengthened so no surprise that CPG fell yesterday when the $ weakened a tad. And as we indicated earlier this week trading on over 20x prospective earnings provides little scope for error in financial reporting so investors may be getting a little nervous. There were only two other fallers in our closely watched 22, Capita down 0.8% to 520p and Mitie down 0.5% to 219p
There is a lot of activity in the social housing arena that is worthy of attention. Subsidies into the housing sector are increasing and will impact further on quoted stocks. 45% of Persimmon’s sales are from buyers using Help to Buy (HTB) so there is already meaningful impact. The area of subsidies to the housing sector and the work of the Housing and Communities Agency (HCA) has had limited effect on quoted stocks in the but that may be changing. Two new programmes have been released this week.
Yesterday news was released on the Shared Ownership and Affordable Homes Programme (SOAHP) 2016-2021 which will allocate £4.7bn to help build 153,000 homes in the five year timescale. In the announcement yesterday £1.3bn of the total was allocated to help build 39,403 homes. Housing Associations took the bulk of the cash but notably Kier (£42m/1,378 homes), Galliford Try (£19m/530 homes) and Morgan Sindall (£12m/420 homes) . Privately owned Keepmoat (£18m/439 homes) and Westleigh (£48m/1,590 homes) also received support. The numbers are not game changers but are significant as they underpin some existing expansion plans.
Whitehall also issued a paper on Accelerated Construction on Wednesday. This proposal seeks to deliver 15,000 starts on surplus publicly owned land via £1.7bn of investment. The proposal is not only to accelerate the release of surplus land swiftly but also to use Offsite Construction techniques to speed up the build process. “The programme is designed to support our market diversification objectives by supporting non-major builders and help tackle the construction skills gap, including through greater use of Modern Methods of Construction (MMC)”.
In our note on Tuesday this week we identified the following key trend for 2017. “Social Housing, especially Local Authority provision and PRS will become more significant. While the Housing White paper has yet to be revealed parts are starting to emerge and it is unlikely to veer much from existing “inclinations” within government. The Autumn Statement included £2.4bn for Housing Infrastructure and £1.4bn for 40,000 more additional affordable homes and £3.7bn is committed to building housing on public sector land. Add to that the 30 Starter Home Land Fund partnerships, 14 new garden villages and three garden towns and something may start to happen. Good for Kier, Galliford, Mears and the brick makers, Ibstock and Forterra. Several housebuilders will also get substantial benefit especially Countryside, Telford and Gleeson. Civitas, Grainger and Sigma Capital should also benefit from these developments. Also note that by the end of 2017 capacity for an annual output of 10,000+ modular dwellings will exist (including Space 4), possibly many more if some plans proceed and while that will go mainly into Social and PRS is will start to alter supply chains and products. (SIG and Kingspan are the main companies with exposure in Modular components).”
The Housing White Paper intended for late 2016 but now expected this month is being released in stages it would seem. In the meantime the government is doing new and additional things, some with timings to coincide with 2020, rather than just laying out proposed legislation which is the intention with White Papers. None of the above changes the prospects for the mainstream quoted house builders, in our view. The intention is to add to the c 170,000 dwellings created at current rates (including conversions) to get to 200,000+ units a year. At least two factors are worth bearing in mind;
• Firstly, these schemes may not get traction as take up could be slow. For example, several Housing Associations are not participating in the Shared Ownership and Affordable Homes programme. The T&Cs on Accelerated Construction include possible indemnities on eventual sale of the properties but also profit share, which may not suit all potential users of the scheme.
• Secondly, to the extent they may get traction there could be some impact on the new housebuilders, especially in a situation where immigration levels dip or the London economy drifts downwards due to Brexit uncertainty. There is an attempt to bring in new organisations to housebuilding but the SOAHP paper does not exclude existing players, we quote, “Government wishes to extend the range of organisations involved in the provision of affordable home ownership. We therefore welcome bids from organisations which have not previously received funding, including house-builders and private sector developers”
The new schemes do not appear replace any existing ones or reduce the commitment to HTB. Nor do the schemes appear to make clear whether a building project can use several lines of funding. The White Paper may bring some greater clarity to the intentions and interaction of the new schemes with existing ones such as the Regeneration Development Funding and the Disposal Proceeds Fund. If it all sounds very complicated we are sure you are right and this area appears to be the second fastest growing one in terms of government employment after Brexit. It also means that housebuilders need an even bigger department to cope with how they use legiclation!
There are few clear conclusions, as yet, on which you could bet your house. But it is clear that the government is highly determined to increase housing supply and not too concerned who does it, other than they are competent. Impatience with the quoted housebuilders rate of build is not new but the interference in the market in terms of subsidy and even down to methods of construction is very new. To the extent it succeeds with even, say a 5% increase, a further 8-10,000 dwellings per annum will aid many sector companies, mostly those named above plus others such as the Merchants, Polypipe and Marshalls. The impact is impossible to calculate accurately but should be quite positive.
Disclaimer - Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. This document may contain materials from third parties, which are supplied by companies that are not affiliated with Edison Investment Research. Edison Investment Research has not been involved in the preparation, adoption or editing of such third-party materials and does not explicitly or implicitly endorse or approve such content. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of publication and is subject to change without notice. While based on sources believed reliable, we do not represent this material as accurate or complete. Any views or opinions expressed may not reflect those of the firm as a whole. Edison Investment Research does not engage in investment banking, market making or asset management activities of any securities. The material has not been prepared in accordance with the legal requirements designed to promote the independence or objectivity of investment research.