InvestmentsApr 24 2014

OMGI backs housebuilders to maintain stellar run

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UK housebuilders can justify and sustain their current high valuations according to Old Mutual Global Investors’ UK equity managers.

Listed housebuilders - which are mainly found in the mid cap area of the market - have been among the top performing sectors in the UK equity market in the past two years, spurred on by government stimulus to kick-start the domestic recovery. But in recent weeks they have been sold down on fears that interest rates will rise and reduce demand for mortgages.

Some UK mid cap managers, including Franklin Templeton’s Paul Spencer and Axa Framlington’s Chris St John, have begun to cut back on their holdings in order to cash in on the strong run.

But Richard Watts, manager of the Old Mutual UK Mid Cap fund, said the sector can justify the high valuations the stocks have come to command. He said investors were currently expecting the market to undergo a “boom and bust” phase similar to the financial crisis in 2007-08, but argued that two main factors meant this was not likely to transpire.

“When you look at the land buying environment there are two things that are very different this time,” Mr Watts said.

“The first is competition - smaller builders have left because they can’t afford to compete. I don’t see that dynamic changing.

“Secondly the supply of land has drastically increased, and builders and get planning permission much faster and on very favourable terms.”

Head of UK equities Richard Buxton added that investors were in danger of “selling too soon”.

“We’ve only had the impact of improving sentiment for 12 months,” he said. “There’s a great danger that you sell too soon.”