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Investing in the house builders

Covering Market, Trends, and Practical (but see LEMON-AID for Building & DIY)
Mike4
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Investing in the house builders

#408919

Postby Mike4 » May 3rd, 2021, 9:55 am

Rather than investing even further in property directly, I am considering buying shares in a house builder, given it is a business I've been loosely involved in all my life and know a little bit more about than yer average Joe.

This is all prompted by the recent thread by Santy here:
viewtopic.php?f=13&t=29223

AiY suggests a new thread in which he offers to post up some figures hence this thread, thank you AiY.

Where I fall down is I don't know how exactly to buy individual company shares. I opened an ISA account with Vanguard last tax year and filled it up for last tax year, but scrumpyjack thinks they are not a platform I can use to buy individual shares. I hadn't fully grasped this when I opened my account or I might have chosen a different platform. (Is platform the right term?)

Anyway, back in the 90s when I dabbled briefly with tech shares (and got my fingers burned), I think I had an account with Hargreaves Landsdowne and I wonder if that is still open. Will they do? Suddenly I'm all interested in those HL-bashing threads on here!
Moderator Message:
For the discussion about brokers please reply here. Thanks. - Chris

UncleEbenezer
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Re: Investing in the house builders

#409533

Postby UncleEbenezer » May 5th, 2021, 12:39 pm

Mike4 wrote:
Moderator Message:
For the discussion about brokers please reply here. Thanks. - Chris

No use replying there if the thread's closed. H-L would certainly be an option (I use them), as would other Usual Suspects.

Any investment either in housebuilders or direct property is a complete political gamble. Housing isn't a market in the normal sense, it's totally dominated by government interventions and hence subject to political winds, and just how much money they'll print to prop up prices.

scrumpyjack
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Re: Investing in the house builders

#409535

Postby scrumpyjack » May 5th, 2021, 12:52 pm

UncleEbenezer wrote:
Mike4 wrote:
Moderator Message:
For the discussion about brokers please reply here. Thanks. - Chris

No use replying there if the thread's closed. H-L would certainly be an option (I use them), as would other Usual Suspects.

Any investment either in housebuilders or direct property is a complete political gamble. Housing isn't a market in the normal sense, it's totally dominated by government interventions and hence subject to political winds, and just how much money they'll print to prop up prices.


In one sense that is true, that the level of house prices maybe substantially influenced by political and other factors. In the short term that could cause builders losses in that the value of their land banks will drop if house prices drop. But it will result in the land they buy to replace what they have built on costing less and margins will recover. Oil companies prepare accounts on a replacement cost basis, builders are not allowed to.

Eventually land prices will settle at House selling price - build cost - profit margin.

That is what happened last time. I thought the market was not sensible to value builders so low, (ie land bank price losses would go for ever) and so bought shares in those builders that I thought would survive. That was a very fortunate call. So I don't think builders are as risky as they can appear.

UncleEbenezer
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Re: Investing in the house builders

#409540

Postby UncleEbenezer » May 5th, 2021, 1:03 pm

scrumpyjack wrote:
UncleEbenezer wrote:
Mike4 wrote:
Moderator Message:
For the discussion about brokers please reply here. Thanks. - Chris

No use replying there if the thread's closed. H-L would certainly be an option (I use them), as would other Usual Suspects.

Any investment either in housebuilders or direct property is a complete political gamble. Housing isn't a market in the normal sense, it's totally dominated by government interventions and hence subject to political winds, and just how much money they'll print to prop up prices.


In one sense that is true, that the level of house prices maybe substantially influenced by political and other factors. In the short term that could cause builders losses in that the value of their land banks will drop if house prices drop. But it will result in the land they buy to replace what they have built on costing less and margins will recover. Oil companies prepare accounts on a replacement cost basis, builders are not allowed to.

Eventually land prices will settle at House selling price - build cost - profit margin.

Indeed.

That's why all this flood of government money can never work long-term. It may give a sugar-rush to the housebuilders, but in a couple of years land prices have risen to absorb that extra money. The original problem is back, but the price point has been ratcheted up.

It's been going on for longer than I can remember - and that goes back to being priced out in the 1980s. But it was also in the 1980s I experienced the contrast of the German housing market: no obsession with "low cost", but they built high-quality instead (most importantly, post-1945 in both cases). So in Germany I could comfortably afford to rent a decent flat (in a tower block, part of a huge estate built around 1970-ish)!

brightncheerful
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Re: Investing in the house builders

#410411

Postby brightncheerful » May 8th, 2021, 10:46 pm

Mike4 wrote:Rather than investing even further in property directly, I am considering buying shares in a house builder, given it is a business I've been loosely involved in all my life and know a little bit more about than yer average Joe.

This is all prompted by the recent thread by Santy here:
viewtopic.php?f=13&t=29223

AiY suggests a new thread in which he offers to post up some figures hence this thread, thank you AiY.

Where I fall down is I don't know how exactly to buy individual company shares. I opened an ISA account with Vanguard last tax year and filled it up for last tax year, but scrumpyjack thinks they are not a platform I can use to buy individual shares. I hadn't fully grasped this when I opened my account or I might have chosen a different platform. (Is platform the right term?)

Anyway, back in the 90s when I dabbled briefly with tech shares (and got my fingers burned), I think I had an account with Hargreaves Landsdowne and I wonder if that is still open. Will they do? Suddenly I'm all interested in those HL-bashing threads on here



This is is the wrong board but necessary imv in the context of your question. Buying shares is simply a matter of registering with a broker, either on line or the old-fashioned way of contacting a stockbroker. On-line, all that's necessary is to provide details to open an account then add some money to the account to buy the shares (the money can be withdrawn when you sell or kept in the account pending. HL for example require a minimum balance of £50. A stockbroker would probably want to meet /interview you first to ascertain your risk profile. When I did that I hadn't clue what the stockbroker was talking about. Risk, what's that?

It then becomes a question of which of the quoted housebuilding to buy shares in. I appreciate you are familiar with the finished product (ie, the property) but I would think, correct me if this wrong, the bulk of your experience is sorting out problems with the boiler etc after the property has been sold to an owner-occupier or investor.

The house builder either buys land or takes an option to buy. Whether the land comes with planning permission or has to be obtained depends. Often the landowner will get outline consent before marketing the proposition for sale. Even then the house builder might try to improve upon the consent. The house builder will either buy direct from the landowner or an intermediary developer such as Gladman. G, for example, gets consent for the landowner then sells the land and consent to the house builder. Despite being a successful developer, G is unpopular with local residents and planning authorise generally and local residents considered it an opportunistic developer because it has the resources to overcome local authority refusals of consent and go to appeal. Local authorities are generally reluctant to refuse consent because if on appeal the appellant wins then the LA would probably have to pay the appellant's costs. Under the development plan for a county, the planning authority has to demonstrate 5 years supply of land to meet Government targets …. In Herefordshire, for example, G got planning consent on appeal despite fierce opposition: it reasoned that the LA couldn't meet the government targets on the land which the council had allocated for residential development as the council didn't own the land, whereas the site which G had was available. Search on-line for Gladman and planning law and you'll find a host of decisions.

For large housing estates, the builder will often build in stages over many years. that is partly to avoid swamping the local market and create an oversupply; also to stagger the capital gain tax for the landowner, assuming the house builder has an option to buy. The advantage too of an option to buy is that the house builder would obtain the planning consent knowing that the landowner cannot sell the land to someone else. Point is that anyone can apply for and obtain planning consent even if they don't own the land in question.

Consent comes in two stage. Outline consent and detailed. Outline is normally subject to conditions, most of which would have to be satisfied to enable detailed consent to be granted. Even with detailed consent, there can be conditions that have to be met before any work can commence. All that takes time which is why house builders generally acquire land years in advance of building on it. the size of a house builders "landbank" is an important factor when evaluating shares. Land values increasing does not mean the price of the house has to increase, that depends upon the strength of the selling market at the time. The longer the house builder has owned or has had the option the more profit can be made on completion of the development. The difficulty with long-term forward-planning is estimating what the market might be like and the prices that can be obtained when the property is marketed for sale. Generally, marketing starts when the estate roads are constructed. The asking price is based upon the housebuilder's own estimation with help from local estate agents and includes a margin above the minimum profit margin: local estate agents might also advise on house design and specification. Recently I found out that the reason my house has a third reception room is that originally the developer planned a integral garage but was advised otherwise by a local agent. (I do have a garage but not integral.)

Depending upon the size of the estate, the mass-market house builders tend to have a minimum number requirement so as to enjoy economy of scale for construction costs and labour, much of which is sub-contracted. A 1000 central heating boilers for example would be cheaper per boiler pro-rata than 50.

Barrett Homes introduced the idea of a fully-fitted property, kitchen appliances, etc. Government initiatives for house selling are popular with house builders. Stamp duty reduction is an obvious one. Help to Buy enables house builders to up the price because people that can only afford to buy because they are being subsidised aren't as fussed at what they pay. Investors are only interested in the letting potential and resale value so to an extent also overpay because they aren't going to live in the property themselves. Cash buyers for occupation often overpay because their thinking is subjective, rather than objective. New property has a premium to second-hand, even though second-hand property generally increases in value more so over time. You will know from your experience, i am sure, that the standard of construction of new builds can leave a lot to be desired. i am told the typical new house has a life-expectancy of two 25 year term mortgages.

House builders share prices tend to do well in a buoyant property selling market and slump when the selling market is flat or depressed. As no one knows for sure when the market is likely to be buoyant the yield is higher because of the risk.

Have fun.

AsleepInYorkshire
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Re: Investing in the house builders

#410428

Postby AsleepInYorkshire » May 9th, 2021, 12:20 am

House builders have two assets.

  1. Land
  2. Their employees (their skills)
Nothing else is of any value. Let's say "Wonderful Homes" owns 50 plots of land that they acquired for £50K per plot. They have assets worth £2.5M. And let's assume that if they build those plots they will achieve a net margin before tax of about 12.5%. And let's assume that all their overheads are cleared before that 12.5% appears. And let's assume that 12.5% is on the selling price. Let's also assume that the value of the land will not improve in the short term.

So "Wonderful Homes" has purchased land worth £2.5m. That investment won't have an income until the new homes are built and sold. So "Wonderful Homes" has to

  1. Build a road to the new homes
  2. Build a show home or two and a sales area
  3. Build a compound area and set up temporary site offices
Before the builder is in a position to sell the first new home and return that money to the bank it is heavily invested with no return.

Now let's imagine as the builder commences work on site the economy takes a dip. And house sales aren't quite as buoyant as they were a year ago. Potential house buyers aren't confident their job's and income are safe. Land values fall on the back of these macro economic events.

The builder has land that they paid £50K/plot for and it's now worth £35K/plot. If the builder sells the land they will lose money. The builder is looking down the barrel of a loss of £750K. Ouch.

The builder decides to mothball the site and wait for macro economic events to turn in their favour. But they need to lay staff off. They also need to continue to fund the expense they have gone to. As the market recovers the builder tries to recruit new staff and skills. But there's a shortage.

Buying house builders shares is a bet on the economy in my opinion.

There will be some who will spend a few hours calculating that the builder can still make a profit even if the value of the land falls by 30%. The builder cannot just keep pumping money into a site that may not sell. The sales office keeps a record of visitors (it's known as footfall in the industry). As footfall drops the number of homes sold will fall. But the builders overheads remain constant ... as they try to retain skills. Preliminaries (site overheads) rise per unit as the speed of sale dictates the speed of build.

House builders profits are intrinsically linked to the state of the economy. Until recently when government has been underwriting new home purchases. There lies danger.

If we assume that a £50K plot of land will support a house sale of £225K then the builder will make 12.5% net on that £225k. That's a net margin of £28K. In a downturn that margin is eroded by

  1. Increased overheads
  2. Reduced revenues
"Wonderful Homes" start to see a reduction in footfall in the sales office. That means one thing - reduced sales over a longer period of time. That 12.5% they predicted when they purchased the land is starting to look a little insecure. They have no option but to reduce the selling prices and protect their capital. But in doing so their margins will be eroded greatly. Their assets are worth less than they paid for them. And they need to retain skills for any upturn.

I can't convince myself that now is the right time to buy any builder. The time to buy a house builder is when everyone else won't go near them. When they really look as if they may fail. And that's yet another gamble.

AiY


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