Real estate, alternative real assets and other diversions

The View from Berkeley Square Robert Fowlds sets out a bold solution for the housing supply crisis and illiquidity in the secondhand homes market

Investor's Notebook

A house roof with two dormer windows and the sun shining between them

Crisis? What crisis?!

Results from the listed home builders this summer describe a sector in rude health, particularly in the mid-market house price range of 250k-350k. Redrow for example reported sales up 21%, PTP up 26%, EPS up 27%, DPS up 70%, and ROE up to 28%. And this has not been at the expense of operating margin (up 50bp to 19.4%) or higher leverage (gearing 6% and falling). On a larger scale both Barratt and Persimmon set out similar market conditions of buoyant demand, modest build cost inflation, good availability of land and benign land price inflation. Even the planning system came in for less bashing than usual! And investors would appear comfortable with this Goldilocks environment with listed stocks up 25%-50% in the last 12 months, trading on 1.5x-3x book value.

Criticism of the home builders has come from commentators who see the sector as maximising profits and return on equity rather than maximising new housing supply – but when I last looked boards of listed companies have a fiduciary duty to their shareholders! The Bovis turnaround, with the new CEO cutting his housing targets and promising a return of capital, helping to re-rate the shares, further illustrates the point. Critics also point to the government’s Help to Buy scheme (c.35%-45% of sales for the majority of home builders) as fuelling the demand-side while doing nothing for new supply. The latter point is well made, but Help to Buy was a legitimate scheme post-GFC to help stimulate the economy and jobs, but critics should be under no illusion – phasing out Help to Buy post-2021 will not increase new housing supply!

Supply facts

The numbers are improving: the Q2 DCLG housing stats show completions of 40,310, up 15% y-o-y, or 153,330 for the 12 month period, up 11% y-o-y. This is not far off the levels of completions pre-GFC and 60% up on the market trough in 2013. That’s not bad progress for a ‘broken’ sector. So what exactly is the crisis?

Lack of new social housing supply

The National Housing Federation latest quarterly stats show that housing associations completed only 9,261 new homes. The majority (57%) were ‘affordable’ but this is totally inadequate. From 1946 to the early 80s, Local Authorities were the main providers of social housing, initially to help rebuild post-WW2 and then to house the baby boom. For nearly three decades Local Authorities were building 100,000 or more homes per annum for social housing. Many blame the Thatcher years for LAs selling off council homes – but this wasn’t the problem, the problem is that housing associations have not filled the supply gap!

Housing associations are curious entities – for a start they have no shareholders! They are also very large in terms of AUM (c.3m homes) and fragmented (numbering c.1760), although the most progressive have been merging to help (in theory) drive cost efficiency, lower their cost of capital, and allow greater levels of new development. But given their gearing and the lack of access to new equity, either public or private, we can’t rely on housing associations to solve the social housing supply crisis. Perhaps their status could be changed to bring in third party equity and more capital market facing management, but I suspect the regulatory and cultural challenges would be too great. And even if HAs double their output, this isn’t sufficient, not by a long way.

A market solution

The housing white paper earlier in the year highlighted that 40% of Local Authorities do not have a Local Plan that meets the projected growth in households, and the paper set out an agenda to insist these plans are brought up to date, homes built faster, and housing product and tenure diversified. We have a new Housing Minister and let’s hope he delivers on this agenda, but central government has to do more, without ripping up the green-belt.

Government land can be a primary source

Central and local government sit on thousands of acres of brownfield land, much of which is located in key growth areas of the country – the MoD alone has huge presence in the south, and operations which are not all location sensitive. Government needs to be more joined up, and on scale we have not witnessed before. An example:

Investor's Notebook

About Robert Fowlds

Robert Fowlds

Robert Fowlds retired from investment banking in 2015 as Head of Real Estate Investment Banking for JP Morgan Cazenove. In 10 years Robert led or co-led around 60 public market transactions including IPOs, equity raises and M&A. Prior to corporate finance, Robert was Co-Head of Real Estate Equity Research at Merrill Lynch, and previously Kleinwort Benson, where his team was #1 ranked in the Extel and Institutional Investor Surveys for 11 years. Robert's early career was as a chartered surveyor.

Articles by Robert Fowlds

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