1. UK Housing Market Landscape

The housing market is a cyclical industry that is positively correlated to the business cycles. It does well with economic expansion, and it is in downturn during economic contractions. Housing is a durable asset, and its demand is driven by low-interest rates, increase in mortgage funds, growth in employment and government support & regulation. The housing properties in the UK are categorized as flats, detached property, semi-detached property, and terraced property. The pricing of these properties is highly dependent on regional market dynamics. The government has been taking encouraging measures to push affordable housing for all, and it wants the younger generation to own a house rather than rent one.

The housing market fundamentals remain attractive as the lending environment continues to be positive with a broad spread of lenders supporting homebuyers and greater competition in the mortgage market. The mortgaged application in the UK surged to 12-year high as it was fueled by additional demand for space during the Covid-19 lockdown. The average home price in the UK rose to £249,870 in September 2020, reflecting a 1.6% rise from August 2020. Moreover, the stamp duty holiday has been incentivizing buyers and vendors to close deals before March 2021. As a part of the stamp duty holiday measure, the threshold for stamp duty has been temporarily increased from the previous rate of GBP 125,000 to GBP 500,000.

The UK housing market has experienced an abrupt change in 2020, and the government measures have been the game-changer for the housing sector. Post reopening of the economy, the UK house prices have improved against the backdrop of a weaker economy. As per the Office for National Statistics data, the average house price in the UK was ~£237,963 in July 2020, which was increased by 2.3% year on year. JLL UK expects UK house prices to grow by around 15% between 2020 and 2024. In the year to May 2020, 256,575 houses were sold in the UK. The JLL expects the UK housing annual deals to reach close to 1.2 million by 2023. As per the Mordor Intelligence report, the market size of the residential housing in the UK is expected to grow at a CAGR of close of 5.28% between 2019 and 2025.

The young people renting homes in the UK are referred to as “Generation Rent”; however, the UK government is pushing the younger people to own a house instead of renting, which are referred as “Generation Buy”.

UK House Prices and Sales Volume

The UK house prices have been trending upwards, as per the Halifax House Price Index, the house prices in the UK rose by around 1.6% month on month in September 2020. The Office for National Statistics reported an average UK house price at £237,963 in July 2020. Based on the regional category, the average house price in London was £484,864, followed by the South East, where the price was £325,734 in July 2020. For the year 2020, the average house price in the UK was £233,635. The total house sales volume in May 2020 was 32,248 in the UK, which was mainly affected by the lockdown. A total of 256,575 houses were sold until May in 2020.

Mortgage Lending Statistics

Recently, the demand in the housing market has pent-up due to the low-interest rates and the waiver of stamp duty. The interest rates are at a low point, which is cheering the buyers to borrow and purchase the house. As per the recent report released by the financial conduct authority (FCA), at the end of Q2 2020, the total outstanding mortgage loan for residential properties stood at £1,513.3 billion. The residential mortgage increased by 3.2% year on year from £1,466.3 billion at the end of Q2 2019.

The gross mortgage advances were £44.1 billion in Q2 2020, which declined by 33.3% from £63.4 billion in Q2 2019. The new lending activities in the Q2 2020 were pulled back by the pandemic and close down of the housing market. Based on the breakup for new loan advances, 48.9% loan was for new home purchase, 44.0% loan was for a remortgage, and 3.1% of the new loan was for further advances. The value of the new mortgage commitments in the coming months was £34.3 billion in Q2 2020.

How is the UK Government Supporting the Housing Market?

The UK government has been supportive in terms of providing affordable housing to all the citizens. The government introduced the “Help to Buy scheme” to provide financial help to purchase the home. As per the scheme, the government provided equity loan to first time and existing home buyers to buy a newly built home, and the purchase price must not be more than £600,000. The scheme allowed the buyers to borrow 20% of the total purchase amount at no interest from the government. The government has extended the scheme to 2023, which was previously ending in 2021. However, only the first time home buyers can avail this scheme.

The waiver of the stamp duty was the most recent action taken by the government to incentivize the investment in the UK and provide a boost to the housing sector. The buyers are not required to pay stamp duty land tax (SDLT) until 1 April 2021 for buying the residential property of less than £500,000. The first time home buyers would continue to get some relief on the stamp duty even after 1 April 2021.

Growth Catalysts

• The low-interest-rate scenario is supportive of the housing market as buyers can avail loan at a lower rate to purchase a property.
• The mortgage availability expands the affordability for the purchasers.
• Supportive government policies provide reassurance for the housing market.
• The UK housing market is undersupplied, and thus there is a gap between home buyers and home availability.
• The increasing number of first time home buyers will underpin the demand. As per the market data, the first time buyers are expected to contribute 33.9% of the home purchases in 2020.
• The rising population of the UK would push the housing purchase and prices.
• Stamp duty holiday on the property sales will boost the demand.

Risks Exposure to the Housing Market

• Increase in the interest rates: The movement of the interest rate would impact the housing market. The mortgage rates will rise with any unexpected increase in the interest rates.
• No trade deal Brexit: The UK leaving the EU at the end of 2020 without a no-trade deal would create uncertainty for the housing market.
• Rise in unemployment and lower economic growth: The pandemic has led to an increase in the unemployment, and it has dampened the growth of the economy.
• Pull-back of the government support: If the government ceases the support measure or increases the stamp duty on a house purchase, it will severely impact the buyer’s sentiment.

Benchmark Index Performance

The construction sector has shown resilience during the Covid-19 crisis, as FTSE All-Share Construction & Material index (with +6.32% return) has outperformed the FTSE All-Share (with -15.43%) and FTSE 100 indices (with -17.09%), over the past year. 

Fig 7: One Year Index Performance

SWOT Analysis

Housing Market Outlook

The UK housing market has remained subdued since 2016, and the housing market is unlikely to shift up materially in 2020. Despite the steepest drop in GDP in the UK’s history, UK real estate market experienced a mini boom after the lockdown ended; however, the prices might fall again if government measures to support the demand comes to an end. 

However, the UK Government has extended the Help to Buy equity loan scheme, which will support the growing demand for homebuyers. It will further help people to buy homes when mortgage lenders are reluctant to offer loans without hefty deposits. Meanwhile, as per Robert Jenrick (housing minister), the government is also planning to introduce a simple, faster and people focused system to accelerate the housebuilding with some automatic approval to meet the rising demand. Since 13 May 2020, when the government removed the Government restrictions on housing market activity, there is a substantial recovery in net reservations, site visitors, and internet activity across the industry.

The housing market has recently shown some green shoots of recovery that was mainly supported by government schemes and low-interest rates. The home purchase mortgage approvals surged to 84,700 in August 2020, and it was close to a 13-year high. In 2020 until now, around 418,000 mortgages have been approved. The mortgage approvals are expected to trend upwards over the short-term as people are moving out to buy houses that were earlier restricted due to lockdown. Having said that, as per the Knight Frank report, the housing sales volume in the UK are expected to decline by 15% year on year in 2020. The housing prices that have trended upwards are expected to be flat for the remaining period of 2020. The housing prices are forecasted to grow at 15% between 2020 and 2024. The number of lenders providing high loan-to-value mortgage has declined post-pandemic, which constrained the housing market activity. But recently, the British prime minister Boris Johnson stated that he would back 95% loan-to-value mortgages for the people buying a house for the first time.

Meanwhile, the IHS Markit/CIPS UK Construction PMI (Purchasing Managers' Index) expanded to 56.8 in September as compared to 54.6 in August 2020, driven by the bounce observed in the housing market. It would be critical to watch out how things unfold once the government support is phased out. The housing market has a long way to go for a full recovery as people in the retail, hospitality and airline sector have been hard-hit, many employees have lost the job, and many have been put on furlough. The government schemes that are supporting the housing sector in the short-run will eventually be pulled back after some time. The long-term fundamentals, such as real earnings growth, unemployment level and interest rate scenario, would define the course of the housing market.

2. Investment analysis and stocks under discussion (PSN, TW, BOOT and RDW)

After gaining insights on the housing sector dynamics, we would look at the business model of four housing players listed on the London Stock Exchange.

1. Persimmon PLC (LON: PSN)

(Recommendation: Buy, Potential Upside: 17.39%, Market Capitalization: GBP 8.27 billion)

Persimmon is a UK based FTSE-100 listed Company that is into home building. The Company is headquartered in the York, and it operates under the brand names that include Persimmon Homes, Charles Church and Westbury Partnerships. FibreNest is the broadband service to homes.

                                                                                                                                                                                                                                                                                                                                                                                                          

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)                                                                                                                       

Our illustrative valuation model suggests that the stock has the upside potential of ~17.39% over the trading price of GBX 2,543.00 (as on 13 October 2020 after the market closed).

2. Taylor Wimpey PLC (LON: TW.)

(Recommendation: Buy, Potential Upside: 21.98%, Market Capitalization: GBP 4.43 billion)           

Taylor Wimpey is a UK based home builder. The Company develops residential buildings in the UK and Spain. In the UK, the Company segregates the business under North, Central & Southwest and London & Southeast. The Company is listed on the FTSE-100 index.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Our illustrative valuation model suggests that the stock has the upside potential of ~21.98% over the trading price of GBX 117.45 (as on 13 October 2020 after the market closed).

3. Henry Boot PLC (LON: BOOT)

(Recommendation: Speculative Buy, Potential Upside: 21.60%, Market Capitalization: GBP 330.29 million)

Henry Boot is a UK based company that operates across the property value chain. It categorizes the business under land promotion, property investment & development and construction. The Company owns businesses that include Hallam Land Management, Stonebridge, Banner, Henry Boot Development, Road Link and Henry Boot Construction.

 

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Our illustrative valuation model suggests that the stock has the upside potential of ~21.60% over the trading price of GBX 250.00 (as on 13 October 2020 after the market closed).

4. Redrow PLC (LON: RDW)

(Recommendation: Hold, Potential Upside: 10.20%, Market Capitalization: GBP 1.66 billion)

Redrow is a UK based housebuilder that was incorporated in 1993. In 2019, the Company launched an online reservation service to enhance the home buying experience. Redrow is listed on the FTSE-250 index.

                               

                                                                                                                                                                                                                              

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Our illustrative valuation model suggests that the stock has the upside potential of ~10.20% over the trading price of GBX 457.20 (as on 13 October 2020 after the market closed).

 

 

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

*The “Buy” or “Speculative Buy” recommendation is also valid for the current price as covered in the report as on 14 October 2020.

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