Regulatory risk and valuations that look high relative to history mean UK housebuilders are no longer an attractive option for income investors, according to Eric Moore, who runs the £190m Miton Income fund.
He said as an income investor the yields offered by many of the UK housebuilders are “very attractive, very tempting, but it is a temptation I have resisted so far found it easy to resist.”
Mr Moore said: “The problem I have in the first place is that UK house prices are obscene. The average annual salary in the UK is £28,000, the average house price is £230,000. That is a multiple of eight.
"People say to me it doesn’t matter because mortgage rates are so low. But that is because money has never been this cheap in the history of money, but prices cannot keep going up.
"There will get to a point where houses are not affordable, and that will hurt profitability. A 5 per cent fall in house prices would mean a 15 to 20 per cent drop in the profits of the housebuilders, and that would obviously hurt the dividends.”
Data released by the Land Registry showed house prices in the UK increased 4.9 per cent in the year to June.
The increase was 0.8 per cent on a monthly basis between May and June.
House prices in London actually fell 0.7 per cent between May and June, the only region of the country to see a fall during that period.
Mr Moore said that despite a range of government initiatives to stimulate house building, the number of new houses being built each year is stagnant.
He said this could lead to a change in political policy that would negatively impact on the returns from the sector.
He said some recently announced remuneration packages for the management teams of certain housebuilders have been sufficiently controversial as to increase the risks of government intervention in the sector.
Mr Moore has just reached his third anniversary as manager of the Miton Income fund, which has yielded 4.4 per cent in the year to the end of July, and the fund manager’s aim is to increase the dividend by 5 per cent a year, every year.
He said the dividend growth is likely to come from the mining and banking sectors in the coming years, as those companies previously cut their dividends, and are now catching up.
Another investor who hasn’t been tempted by the yields offered by the house builders is Adrian Frost, who runs the £6.4bn Artemis Income fund, and has recently sold out of Persimmon.
Persimmon shares have risen from £1.73 to £2.53 over the past year.
Mr Frost retains an interest in Berkeley Homes, which is also a housebuilder, as he feels the shares are cheap enough to justify the risks.
He said: “The reason for our sale was its valuation which, at three times book value, is high relative to history.
"We also anticipate rough waters ahead for housebuilders (from politics rather than the economy).
"Housebuilding is always on the political agenda and we feel that the sector's burgeoning profitability, which coincides with support from Help to Buy, will increasingly jar with Westminster and so heighten the risk of intervention.”
Simon Gergel, who runs the £689m Merchants Investment Trust, is another investor wary of the investment case for the UK housebuilders, believing valuations to be too high, but as with Mr Frost, he believes he has found one exception - in his case it is Bovis Homes.
He said: “We have not become positive on the housebuilding sector more generally, this is a specific view on Bovis as an attractively priced recovery situation. The shares trade at a significantly lower valuation than their peers.”
david.thorpe@ft.com
