Is it the right time to ditch housebuilders?

HoUSeBUILDeRS have been making their names known for all the wrong reasons this year.

Jeff Fairburn, chief executive of FTSe 100 business Persimmon, has been criticised by his peers for bringing the industry into disrepute over his £75m bonus.

The 52-year-old then walked out of a BBC Look North interview when asked about the payout, telling the reporter it was ‘unfortunate’ he had brought it up.

Meanwhile Persimmon’s share price is languishing 20.5pc lower than it was a year ago.

Despite announcing record profits in September and a positive update a month later, rival Barratt Developments has suffered much the same fortunes in terms of its shares.

A warning over slight uncertainty in London knocked Berkeley Group in September, while chairman Tony Pidgley’s statement in June that his company had waved goodbye to its days of peak profits wiped millions off its market value.

With Britain’s biggest housebuilders down in the doldrums, should investors be steering clear of the sector? Sam Cullen, an analyst at broker Berenberg, says: ‘If you look across the sector, on average, earnings upgrades have been 5pc to 6pc this year. But the shares are off around 20pc to 25pc.’

This is largely down to fears about Brexit, he says. Investors have no idea what the outcome of negotiations to leave the eU will look like, or how that will affect the economy or consumer confidence. A negative reaction could hit the housing market, squeezing builders’ revenues and profits. he suggests that the sinking share prices could in fact be more of a behavioural economics issue, where investors are deterred by emotional reasoning rather than having any concerns about the fundamentals of the companies.

Cullen says: ‘The greatest amount of fear about Brexit is in London and the South east, which is where most finance professionals live and work.

‘They sometimes forget that the main reason we’re leaving the eU is because more voted for it rather than against it, so logic would say that most are going to be happy with the decision and their consumer confidence shouldn’t be impacted,’ he said.

There have undoubtedly been wobbles more recently in the London housing market. earlier this month, Crest Nicholson – which has a larger exposure to the area – warned its profits may be hit by slowing sales in London and the South east.

Regardless of Brexit, Peel hunt analyst Clyde Lewis notes that the UK population will still need houses – and someone will still have to build them.

Lewis says: ‘The younger generation in particular are the ones that are housing-poor, and it’s a big issue for the economy.’

housebuilders outside of the London area may be a safer bet for now.

Cullen picks out Bellway. It has no London exposure, is growing fast and its shares are currently valued much lower than some of its competitors.

Lewis adds that Taylor Wimpey also looks like a strong choice – it’s forecast to yield 35pc in dividends over the next three years, meaning an investor should get a third of the money they paid for the shares back over that short horizon.

Persimmon also has no London exposure and very affordable homes, though there’s no doubt that normal investors may be reluctant to buy into a company where the boss’s bonus exceeds any normally conceivable sum.

‘Persimmon is a well-run business, so the management deserved a bonus,’ says Lewis.

however, he calls the lack of a cap to limit the size of the payout a ‘monumental’ mistake, which won’t be repeated. STILL, shareholders have benefited from the company’s strong financial performance – and could continue to do so.

Cullen expects housebuilders to start to pick up soon after the UK leaves the eU, when investors feel more sure that the housing market isn’t headed for a slump. Lewis believes a rebound could even come before this point.

The housebuilders certainly aren’t short of work, as mainstream political parties on both sides of the fence are keen to beef up the UK’s housing stock.

Their balance sheets are largely in better shape than they have been in years and for savers, it could be worth taking a punt while the shares are depressed.