UK mid-cap fund managers have begun to pare back on successful investments in listed housebuilders as valuations have become “stretched”.
The housebuilding sector has been one of the most lucrative areas to invest in since the financial crisis, with most stocks having posted returns of at least 100 per cent in the past three years.
But in recent weeks leading UK equity managers have sold down their holdings to cash in on the gains, as well as reflecting other changes, such as Barratt Developments’ promotion out of the mid-cap FTSE 250 index.
Chris St John, manager of the £71m Axa Framlington UK Mid Cap fund, said: “I reduced exposure to this sector as valuations look stretched... There were also slight signs that housebuilders may need to change their financing structure to hit targeted rates of return – i.e. take on debt to buy inflating land prices.”
Richard Bullas, co-manager of the Franklin UK Smaller Companies and Mid Cap funds, added: “Housebuilders were undervalued opportunities two or three years ago, when the expectation was that they were never going to build another house again. Help to Buy was a bit of a steroid injection, but underlying you could see long-term growth.
“Valuations now are looking a little bit stretched and we’ve been reducing in the past few months.”
Mr Bullas and colleague Paul Spencer, who co-manages the UK Smaller Companies and UK Mid Cap funds, have sold positions in Persimmon and Berkeley Homes, both of which have gained more than 150 per cent in the space of three years. The managers have also cashed in on the stellar performance of Crest Nicholson, which has gained 48 per cent since listing on the stockmarket in February 2013.
Instead, the Axa Framlington and Franklin Templeton managers are backing “secondary” plays on the housing market, including suppliers such as Topps Tiles and storage company Safestore.
“The underlying housing market is still on a sustainable recovery but valuations are starting to look pretty full and it is difficult to see an upside,” Mr Bullas said. “We’ve been looking at secondary plays since early last year.”
Mr St John added that he had retained some exposure to regional housebuilders, as such companies “are still able to buy land at prices that allow them to achieve their targeted rates of return”.
He said: “The question is, will housebuilders lose their financial discipline and start to reduce their targeted returns when buying land? In a strong sellers’ market, with rising house prices, the housebuilders’ profit and loss accounts will look impressive but cashflows may suffer as the cost of replacement land rises. I am steering clear of housebuilders trying to buy land in London.”
At the end of last year David Griffiths, co-manager of the £130.4m Kames Capital UK Equity Absolute Return fund, said he had been reducing exposure to housebuilders as the recovery in the sector had “probably run its course”.
“The Bank of England was very vocal that it did not want a housing bubble to develop and that will probably cap valuations on housebuilders,” he said.
In three years the FTSE All-Share sector has risen 26.5 per cent, while share price data for nine of the UK’s biggest listed housebuilders show gains of between 107.5 per cent and 369 per cent in the same period.
