Bovis Homes Group (LSE: BVS) rounded off a bad year for housebuilding stocks by issuing a shock profit warning yesterday. This took markets by surprise because only last month Bovis said it was on course for record annual revenues. So are we finally witnessing the long-awaited property crash?
Down they go
Markets briefly thought so, with Bovis falling 5.26% yesterday and fellow housebuilders Barratt Developments, Berkeley Group Holdings, Crest Nicholson Holdings and Persimmon also tumbling. However, they soon settled, with Bovis saying this was a logistical issue rather than a fundamental problem, caused by delays in getting the final sign-off for 180 houses before the end of the year. It wasn’t due to a collapse in demand and the housing market going into a brutal death spiral, for example.
It may hurt Bovis as it cuts its forecast 2016 pre-tax profits from £183m to between £160m and £170m, but it says little about the sector. Clearly, investors are rattled after a tough year, which has seen Barratt and Berkeley Group fall almost 25%, Bovis and Crest Nicholson slide 18%, and Persimmon drop 12%. However, all are trading at far higher levels than five years ago (Barratt, for example, is up 418% in that time), so retrenchment was inevitable at some point.
Shaky foundations
Although Brexit has added to investor nervousness, house builders claim it has had little direct impact on sales, at least so far. Demand for property is firmly underpinned by supply shortages and record low interest rates. That could change if UK interest rates start rising in 2017, but aggressive tightening seems unlikely to me. The Bank of England will be in no rush to hike rates as Brexit uncertainty creeps through the UK economy.
There are clear signs that the housing market is beginning to slow. More vendors are now willing to drop prices to secure a sale, with one in three going for an average £23,860 below the asking price, a cut of 7.76%, according to new figures from Zoopla. In London, the average price cut is £58,498.
Foreign affairs
Most experts predict a slowdown in 2017, with Halifax claiming growth will fall to between 1% and 4% by the end of the year. Prime London is most at risk, with prices in Kensington and Chelsea down 4.9% over the past year already, as higher stamp duty and tougher tax rules scare away foreign investors.
However, much of this year’s slippage has been driven by sentiment rather than fundamentals. The property shortage, low levels of housebuilding and rock bottom interest rates should maintain demand unless Brexit or a black swan deliver a real shock next year.
Full house
2017 won’t be an easy year for the housebuilders but much of the uncertainty is reflected in the price. Barratt, for example, trades at 8.44 times earnings and yields 3.95%. Bovis trades at 8.5 times earnings and yields 4.92%. Persimmon trades at 10.08 times earnings and yields 6.3%. Berkeley trades at 10.54 times earnings and yields 7.08%. These are tempting valuations and yields, and now could be a good time to defy the doom-mongers and start building up your property portfolio.
