1. UK Construction and Real Estate Sector Landscape

The housing construction market has got a boost in terms of volume and prices, as the UK Chancellor, Rishi Sunak cut the stamp duty and temporarily raised the threshold for stamp duty from £125,000 to £500,000. The favorable tax reforms have saving £15,000 for buyers (if they are buying a property of £500,000 or more), which has brought a mini-boom in the housing industry.

The UK housing real estate market is fragmented due to low market share concentration. However, it is facing a shortage of houses or new constructions, which has led to higher demand. The market fundamentals remained attractive with the following key drivers: positive lending environment, clarity on Help to Buy scheme, demand continues to exceed supply and attractive land market. The government remains supportive of the industry and planning to introduce a people-focused system to accelerate the housebuilding with some automatic approval to meet the rising demand.

On 17 February 2021, the Office for National Statistics released a monthly housing pricing data for December 2020. The main points of the publication were as follows:

• The UK average house prices surged 8.5% year-on-year in December 2020, registering the highest annual growth since October 2014.
• The average house prices increased by 8.5% in England, 8.4% in Scotland, 10.7% in Wales, and 5.3% in Northern Ireland.
• The North West witnessed highest annual growth of 11.2%, while London had shown the lowest annual growth of 3.5%.

On the other hand, office real estate is likely to remain subdued in 2021, while UK high-street is suffering from high costs for retail real-estate. Meanwhile, logistic real estate can get a boost with weaker supply and strong demand.

On 03 March 2021, Finance Minister Rishi Sunak had extended the stamp duty holiday till the end of September 2021. Furthermore, he also announced a new mortgage guarantee scheme to support first-time homebuyers in raising funds to purchase a house, which they cannot afford independently.

Key Trends in the Construction and Real Estate Sector

• Change in Buying Behavior - Pandemic has changed the buying behavior as the demand for less densely populated location has increased. Even the way of viewing a property has changed. As per the UK government guidance, buyers should take a virtual view through estate agents offing house videos and visit home in-person only when considering a property.
• Growth of Digital Disruptors – Online aggregators, such as Airbnb and Uber have disrupted the construction and real estate industry by chaining the business model of hospitality and rental properties.

Risk Exposures to the Construction and Real Estate Sector

• Operational Risk - The delay in the project deliveries amid Covid-19 pandemic can also lead to financial penalties. Moreover, the inadequate supply or availability of land or new sites can hamper the growth strategy. Furthermore, increased competition could increase land prices or make it harder to secure attractive sites.
• Macro-economic Uncertainty – Economic downturn and economic volatility can significantly impact the real estate market and consumer confidence.

Benchmark Index Performance

Based on the last one-year performance, the FTSE All-Share Construction and Materials index has outperformed the FTSE 100, FTSE 250, and FTSE All-Share index. The FTSE All-Share Construction and Materials index generated a return of about 34.19%; however, the FTSE 100 generated a return of around 15.85%, FTSE 250 generated a return of nearly 21.49%, and FTSE All-Share produced a return of around 17.62%.

Figure 1: One Year Benchmark Index Performance

(Source: Refinitiv, chart created by Kalkine Group)

SWOT Analysis

Construction and Real Estate Sector Outlook

In a nutshell, Covid-19 pandemic had arguably put a boost in the real estate with government support measures, work-from-home trend, and online retailing. However, the UK economy might take time to recover to pre-pandemic size, the combination of low inflation, low interest rates, resolution of Brexit uncertainty and powerful fiscal stimulus. Therefore, a good medium-term recovery is expected.

As per some experts, the market size of the UK construction industry is projected to register a CAGR of ~8.5% between 2019 to 2024 and reach around GBP 236.8 billion by 2024; however, the market growth is dependent upon the consumer spending, and economic recovery following the pandemic impact. According to the British Property Federation, the market value of UK real estate is worth around £1,662 billion, which represents 21% of total net wealth.

Meanwhile, the IHS Markit/CIPS UK Construction PMI (Purchasing Managers' Index) expanded to 54.6 in December 2020 as compared to 54.7 in November 2020. It reflected a sustained rebound in business activity.

2. Investment analysis and stocks under discussion (BWY, FORT, GLE, CRH)

After gaining insights into the construction and real estate sector, we would look at the business model of four construction and real estate players listed on the London Stock Exchange.

A. Bellway PLC (LON: BWY)

(Recommendation: Buy, Potential Upside: 18.63%, Market Capitalization: GBP 4.03 billion)

Bellway PLC (LON: BWY) is an FTSE 250 listed residential property developer. It is engaged in housebuilding and caters to the need of the population across England, Scotland, and Wales regions. The Company sells their homes through two main brands, namely Bellway and Ashberry.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 18.63% over the closing price of GBX 3,269.00 (as on 09 March 2021).

B. Forterra PLC (LON: FORT)

(Recommendation: Speculative Buy, Potential Upside: 17.44%, Market Capitalization: GBP 628.78 million)

Forterra PLC (LON: FORT) is an FTSE All-Share listed manufacturer of masonry products. Moreover, the Company has one of the leading positions in clay bricks and concrete blocks.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 17.44% over the closing price of GBX 275.00 (as on 09 March 2021).

C. MJ Gleeson PLC (LON: GLE)

(Recommendation: Speculative Buy, Potential Upside: 20.71%, Market Capitalization: GBP 476.53 million)

MJ Gleeson PLC (LON: GLE) is an FTSE All-Share listed Company, which focuses on building low-cost houses and strategic land promotion. It operates with two divisions - Gleeson Strategic Land and Gleeson Homes.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 20.71% over the closing price of GBX 818.00 (as on 09 March 2021).

D. CRH PLC (LON: CRH)

(Recommendation: Hold, Potential Upside: 14.55%, Market Capitalization: GBP 26.73 billion)

CRH PLC (LON: CRH) is an FTSE 100 listed Company, which provides building materials and operates through nearly 3,100 location in 30 countries.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 14.55% over the closing price of GBX 3,406.00 (as on 09 March 2021).

*All forecasted data and peer information have been taken from Refinitiv, Thomson Reuters.

*The "Buy” and “Speculative Buy” recommendation is also valid for the current price as covered in the report as on 10 March 2021.

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