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There are positive and negative announcements to digest
Thursday 06 Oct 2016 Author: Tom Sieber

Investors in property companies and housebuilders need to digest a large number of important announcements made over the past few weeks. The overall impact looks a net positive.

Our best idea in this space is specialist housebuilder MJ Gleeson (GLE). Its twin track approach of developing low cost homes in the North of England and strategic land sales in the South continues to pay off in spades, reflected in a good set of full year results published on 26 September 2016. The company’s average selling price is £125,700, with around 80% of its customers being first time buyers.

The appeal of Gleeson

MJ Gleeson posted a 63% rise in pre-tax profit to £28.2m for the 12 months to 30 June 2016. The dividend was increased by 45% to 14.5p per share. At 603p the company trades on a relatively undemanding 12.2 times June 2018 consensus earnings.

The Help to Buy mortgage guarantee scheme will be scrapped at the end of 2016. However, elements of the broader scheme are being maintained. Most relevant for housebuilders is the continuation until 2020 of the equity loan scheme. This helps first time buyers purchase a new home with a 5% deposit.

It is also worth remembering first time buyers will get another form of assistance from April 2017 with the launch of the Lifetime ISA. The Government will give a monetary bonus to individuals investing in the wrapper, subject to certain conditions.

Mortgage approvals in August 2016 recorded their lowest figure since November 2014 and were down 16% year-on-year, according to new Bank of England data.

Liberum analyst Charlie Campbell says the real test will come with September data (out 31 October 2016), when approvals will reflect applications made since the EU referendum.

Chancellor Philip Hammond announced in his 3 October 2016 speech to the Conservative Party conference £5bn worth of investment in new homes. The package includes a £2bn fund to speed up building by using public land and a £3bn loan pot for the smaller housebuilders frozen out of the market by a lack of bank funding.

The Government also plans to relax planning rules with a presumption in favour of residential development.

All in all, there are positive and negative developments in the property market. If you consider the potential for further interest rate cuts and the fundamental imbalance between supply and demand in the UK housing market, the backdrop looks encouraging for housebuilders.

Just don’t ignore the risk of a short-term market correction once Brexit negotiations get underway. (TS)

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