Government shift adds ‘political risk’ to property stocks

The unexpected changes to the government’s Funding for Lending Scheme (FLS) last week have increased political risk to housebuilders, according to UK equity managers.

In a joint statement on November 28 chancellor George Osborne and Bank of England governor Mark Carney said there was “no longer a need” for the FLS to support the mortgage market as the housing sector was “picking up”.

The scheme will now focus purely on lending to businesses when it is extended next year.

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UK equity managers, especially those operating in the small- and mid-cap spaces, have been piling into companies linked to the housing market such as housebuilders and suppliers, but these stocks sold off suddenly last week as investors were spooked by the withdrawal of government stimulus.

Persimmon Homes, which was promoted to the FTSE 100 index earlier this year, fell 6.3 per cent on Thursday, while Taylor Wimpey, Bellway and Barratt Developments all fell by more than 5 per cent.

Richard Watts, manager of the £1.2bn Old Mutual UK Mid Cap fund, said the changes had increased “political risk” in the sector, as investors would now be waiting for the Treasury to assess the impact of the Help to Buy programme, which is specifically aimed at house buyers.

“[The changes are] a warning shot from the Bank of England that it will watch the housing market and won’t let a bubble happen,” Mr Watts said.

David Griffiths, co-manager of the £130.4m Kames Capital UK Equity Absolute Return fund, said he had been reducing exposure to housebuilders in recent months as the recovery in the sector “has 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.

Jupiter’s Steve Davies, co-manager of the £972m UK Growth fund, said investors had been “looking for a reason to top-slice” their holdings following a strong run, but argued that the impact on overall mortgage lending was likely to be minimal.

But some managers last week said they were retaining their exposure.

Mr Watts, who has been bullish on housebuilders, described the sell-off as “frustrating” as the sector had recently resumed its climb after a few weeks of lacklustre returns. He added that it was a “knee-jerk reaction” from investors and marked the exit of “hot money” from the sector.

“We do want some house price inflation but in line with wider inflation figures,” Mr Watts added.

“Housebuilders are compelling value with house prices where they are.”

JPMorgan Asset Management’s John Baker said he had a 4 per cent overweight position in housebuilders in his £150m JPMorgan UK Dynamic fund, adding he would maintain this in spite of sector volatility.

“We judge positions relative to each piece of newsflow but we are comfortable with what was announced,” he said.

“There should be no negative impact on housing demand, so we are happy to stay overweight in housebuilders and estate agents.”