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Investing in house builders

Investment discussion for beginners. Why you should invest your money, get help getting started
Mike4
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Investing in house builders

#442694

Postby Mike4 » September 16th, 2021, 8:54 am

Once again, my lack of basic knowledge of the nuts and bolts of how to invest has for several years prevented me from buying into the house-building sector. My cash in the bank slowly depreciates as I get on with day-to-day life instead of getting to grips with it and actually putting it somewhere useful.

So, some naïve questions...

1) Are there investment trusts specialising in the sector, or do I have to buy individual shares?

2) Are there individual boards here for each of the big players, Taylor Wimpey, Barratt, Persimmon etc? Searches for those names seem to throw up mostly peripheral discussions of them on the HYP boards.

3) Is there a board discussing the sector?

I feel I have more questions to come but don't know enough yet to articulate them!

Many thanks for any answers...



(Edit for spelling.)

dealtn
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Re: Investing in house builders

#442702

Postby dealtn » September 16th, 2021, 9:24 am

Mike4 wrote:Once again, my lack of basic knowledge of the nuts and bolts of how to invest has for several years prevented me from buying into the house-building sector. My cash in the bank slowly depreciates as I get on with day-to-day life instead of getting to grips with it and actually putting it somewhere useful.

So, some naïve questions...

1) Are there investment trusts specialising in the sector, or do I have to buy individual shares?



Not really. The sector is too small and ITs in the general sector tend to be dominated by REITs or Commercial Property, not House Builders as such.

Mike4 wrote:
2) Are there individual boards here for each of the big players, Taylor Wimpey, Barratt, Persimmon etc? Searches for those names seem to throw up mostly peripheral discussions of them on the HYP boards.



Yes.

Stocks and Share Dealing Discussions

viewforum.php?f=33

where views on individual shares are discussed and the merits of investing in them (although I can't recall much recently with respect to House Builders)

Or with respect to News, there is the Company Share News Board

viewforum.php?f=94

which will have individual threads covering the specific companies such as:

Taylor Wimpey viewtopic.php?f=94&t=16474

Barrett Developments viewtopic.php?f=94&t=17601 and

Persimmon viewtopic.php?f=94&t=16418 being the ones you mentioned.

Mike4 wrote:
3) Is there a board discussing the sector?



Generally you could find discussions on Property Investment Discusions

viewforum.php?f=13

but in practice that is dominated by direct investment in property, not the builders of homes.

Mike4 wrote:
I feel I have more questions to come but don't know enough yet to articulate them!

Many thanks for any answers...



(Edit for spelling.)

scrumpyjack
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Re: Investing in house builders

#442715

Postby scrumpyjack » September 16th, 2021, 9:58 am

I’m not sure I would invest in house builders shares at current prices, but then I probably think that about most shares now! Persimmon and Barratt have been ten baggers for me and their level of profitability is so high that I tend to think it can’t go on long term. On the other hand there is a seemingly insatiable demand for housing, it seems more difficult for new competition now to enter the market, with all the red tape and planning rules etc, and builders have not repeated their previous mistakes at this stage of the cycle by buying each other at inflated prices or over investing.

Moreover they do make real cash profits at a stonking level without resorting to the creative accounting of Core or Adjusted profits so their large dividends are actually earned in cash rather than financed by increased borrowings. So I haven’t been able to bring myself to sell some. Objectively they are too large a part of my portfolio (as is SMT) but I hate selling winners!

Hard to see what other sectors are more attractive though. People need houses, the population keeps increasing and mortgages keep being cheap.

Mike4
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Re: Investing in house builders

#442717

Postby Mike4 » September 16th, 2021, 10:12 am

scrumpyjack wrote:I’m not sure I would invest in house builders shares at current prices, but then I probably think that about most shares now! Persimmon and Barratt have been ten baggers for me and their level of profitability is so high that I tend to think it can’t go on long term. On the other hand there is a seemingly insatiable demand for housing, it seems more difficult for new competition now to enter the market, with all the red tape and planning rules etc, and builders have not repeated their previous mistakes at this stage of the cycle by buying each other at inflated prices or over investing.

Moreover they do make real cash profits at a stonking level without resorting to the creative accounting of Core or Adjusted profits so their large dividends are actually earned in cash rather than financed by increased borrowings. So I haven’t been able to bring myself to sell some. Objectively they are too large a part of my portfolio (as is SMT) but I hate selling winners!

Hard to see what other sectors are more attractive though. People need houses, the population keeps increasing and mortgages keep being cheap.


Thanks for your views. The bit I highlighted is exactly what sprang to mind as I read the first part of your sentence!

But yes even if shares are fully priced I think Mr Gove has enough gall and thick skin to run roughshod over all the nimbies and actually get a tonne of new housing built. Also, governments at the most crude and base level feel driven to expand their populations (more people to tax always better than fewer) so as you say, demand for accommodation will grow indefinitely, if lumpily.

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Re: Investing in house builders

#442720

Postby fisher » September 16th, 2021, 10:33 am

I hold shares in Persimmon which I first bought in 2007. I added to them in 2008 and still hold the majority I bought. They have done very well for me and have given me a good amount of income in dividends (and capital returns).

I held Taylor Wimpey -bought in 2005 and sold in 2011.

I also held a small amount of Barratt (bought in 2018) which I have only just sold. The Barratt was too small a holding for me to want to continue to monitor in my portfolio so I sold to add the capital to other existing holdings as part of a larger portfolio rationalisation. Not that I have anything against Barratt.

I am happy holding Persimmon. I know some people criticise the quality of their product but I believe they are currently addressing this.

I don't know how much you are considering investing Mike4, but perhaps you could consider buying more than one if you are unsure? Splitting your investment into two or three of the possible candidates can be easier psychologically than committing it all to one unless you have a strong opinion on which is the better choice.

AsleepInYorkshire
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Re: Investing in house builders

#442767

Postby AsleepInYorkshire » September 16th, 2021, 2:25 pm

scrumpyjack wrote:On the other hand there is a seemingly insatiable demand for housing, it seems more difficult for new competition now to enter the market, with all the red tape and planning rules etc, and builders have not repeated their previous mistakes at this stage of the cycle by buying each other at inflated prices or over investing.


In the 80's national housebuilders accounted for 33% of new build. That's now over 70%. Government are keen to get smaller companies into the market place and Homes England will sponsor many small business'. I've seen them back some real "iffy" offerings. New competition should come along quite quickly. That aside your post sums up the market place as at today.

AiY
Quantity Surveyor & Commercial Manager (41 years experience)

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Re: Investing in house builders

#442774

Postby scrumpyjack » September 16th, 2021, 2:44 pm

AsleepInYorkshire wrote:
scrumpyjack wrote:On the other hand there is a seemingly insatiable demand for housing, it seems more difficult for new competition now to enter the market, with all the red tape and planning rules etc, and builders have not repeated their previous mistakes at this stage of the cycle by buying each other at inflated prices or over investing.


In the 80's national housebuilders accounted for 33% of new build. That's now over 70%. Government are keen to get smaller companies into the market place and Homes England will sponsor many small business'. I've seen them back some real "iffy" offerings. New competition should come along quite quickly. That aside your post sums up the market place as at today.

AiY
Quantity Surveyor & Commercial Manager (41 years experience)


It would be healthy for the market if small builders can rise again to provide competition (though less so for the existing mega builders!). However the government wanting something, and it actually happening, are not necessarily the same.

With your background you obviously know far more about this than I, but at present it seems to need huge scale to deal effectively with planning departments and everything else, which I suspect is one of the factors that has caused the decline in small builders. Until HMG do something about the planning system it is hard to see that changing?

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Re: Investing in house builders

#442776

Postby dealtn » September 16th, 2021, 2:53 pm

Not really the right board to discuss, but my preferred pick is Watkins Jones (WJG). It might not be 100% aligned with your thinking but has an interesting angle on property and accommodation building. Happy to discuss elsewhere.

AsleepInYorkshire
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Re: Investing in house builders

#442778

Postby AsleepInYorkshire » September 16th, 2021, 3:02 pm

scrumpyjack wrote:
AsleepInYorkshire wrote:
scrumpyjack wrote:On the other hand there is a seemingly insatiable demand for housing, it seems more difficult for new competition now to enter the market, with all the red tape and planning rules etc, and builders have not repeated their previous mistakes at this stage of the cycle by buying each other at inflated prices or over investing.


In the 80's national housebuilders accounted for 33% of new build. That's now over 70%. Government are keen to get smaller companies into the market place and Homes England will sponsor many small business'. I've seen them back some real "iffy" offerings. New competition should come along quite quickly. That aside your post sums up the market place as at today.

AiY
Quantity Surveyor & Commercial Manager (41 years experience)


It would be healthy for the market if small builders can rise again to provide competition (though less so for the existing mega builders!). However the government wanting something, and it actually happening, are not necessarily the same.

With your background you obviously know far more about this than I, but at present it seems to need huge scale to deal effectively with planning departments and everything else, which I suspect is one of the factors that has caused the decline in small builders. Until HMG do something about the planning system it is hard to see that changing?

Planning departments aren't without recourse. A planning appeal is not considered by the refusing authority. If they lose at appeal it can be costly for them. There are huge swathes of land that can be built upon and as you've indicated the large builders can swing resources into the planning stages of any development. But for the most the engine room for most builders is the "QS". The commercial team as "guardians of the business pound" are required to value land before it is purchased. Pointless paying £1m for land that's worth half that. A QS straight out of college with no experience can expect to earn £35K rising rapidly to the early £50's. He will be taught the process of build by his employer and understand the underlying cost drivers. A Senior QS in the right company with the right skillset will earn £65K basic + a fully expensed car and a decent bonus if they deliver targets. Because QS's are involved in creating the profit from commencement to completion they often rise through their ranks to positions on the board.

The problem now is that the is a huge skill shortage in many trades but the worst is QS's. You could give me a trowel and a level and call me a bricklayer but I could never lay bricks without first serving an apprenticeship. You can't give someone a mobile phone, a laptop and access to Excel and call them a QS. But many firms are doing just that now.

AiY

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Re: Investing in house builders

#475677

Postby vand » January 24th, 2022, 9:49 am

Sector is getting pummelled in the face of rising interest rates and the results of the cladding decision.

The market must surely think that earnings cuts and probably dividend cuts are on the way.

I think they're good value, but the problem is that the sector is so cyclical. In the last 2 housing crashes they lost huge amounts and were trading for pennies on the £ at their nadir.

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Re: Investing in house builders

#475805

Postby scrumpyjack » January 24th, 2022, 5:09 pm

vand wrote:Sector is getting pummelled in the face of rising interest rates and the results of the cladding decision.

The market must surely think that earnings cuts and probably dividend cuts are on the way.

I think they're good value, but the problem is that the sector is so cyclical. In the last 2 housing crashes they lost huge amounts and were trading for pennies on the £ at their nadir.


Last time they had geared themselves up with huge borrowings so when the downturn came, some, like Barratt, nearly went under.
That is not the case now and they have been far more prudent in their borrowings, so IMO whilst a fall in profits is possible/likely it won't be nearly as catastrophic. Also what tends to happen in a downturn in house prices is that land prices fall as well but there is a lag in that coming through to a profit recovery. So for a while profits reflect their land bank which will have been bought at higher prices.

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Re: Investing in house builders

#475848

Postby Mike4 » January 24th, 2022, 8:17 pm

scrumpyjack wrote:
vand wrote:Sector is getting pummelled in the face of rising interest rates and the results of the cladding decision.

The market must surely think that earnings cuts and probably dividend cuts are on the way.

I think they're good value, but the problem is that the sector is so cyclical. In the last 2 housing crashes they lost huge amounts and were trading for pennies on the £ at their nadir.


Last time they had geared themselves up with huge borrowings so when the downturn came, some, like Barratt, nearly went under.
That is not the case now and they have been far more prudent in their borrowings, so IMO whilst a fall in profits is possible/likely it won't be nearly as catastrophic. Also what tends to happen in a downturn in house prices is that land prices fall as well but there is a lag in that coming through to a profit recovery. So for a while profits reflect their land bank which will have been bought at higher prices.


This is a curious thing. My next door neighbour a few years ago used to manage the land bank for a major name national house builder. When chatting over the garden fence he would sometimes express the view that every parcel of land he ever bought he paid horribly over the odds but he was under huge pressure to keep the stocks up so they could continue to build. I must look up their share price history but I think they have probably done very well.

On a smaller scale I've always felt the same about pretty much every house I ever bought.With the passage of time they all turn out to have been good decisions but every one felt terribly marginal at the time.

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Re: Investing in house builders

#476276

Postby vand » January 26th, 2022, 10:34 am

Large director buy at Persimmon: https://finance.yahoo.com/news/insider- ... 42062.html

I have use the recent weakness to build a position in PSN myself. Maybe a 10% dividend is too good to be true, but I'll take the chance.

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Re: Investing in house builders

#476282

Postby AsleepInYorkshire » January 26th, 2022, 10:53 am

vand wrote:Large director buy at Persimmon: https://finance.yahoo.com/news/insider- ... 42062.html

I have use the recent weakness to build a position in PSN myself. Maybe a 10% dividend is too good to be true, but I'll take the chance.

I think government support for house buyers comes to a close next year?

Worth checking?

If so I think it may be a game changer

AiY(D)

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Re: Investing in house builders

#476297

Postby BullDog » January 26th, 2022, 12:20 pm

AsleepInYorkshire wrote:
vand wrote:Large director buy at Persimmon: https://finance.yahoo.com/news/insider- ... 42062.html

I have use the recent weakness to build a position in PSN myself. Maybe a 10% dividend is too good to be true, but I'll take the chance.

I think government support for house buyers comes to a close next year?

Worth checking?

If so I think it may be a game changer

AiY(D)

With a barely covered dividend, interest rates on the increase and the government seemingly gunning for the builders to cover as yet unknown remediation costs on tens of thousands of apartments - Persimmon look like a dividend cutter in the making to me.

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Re: Investing in house builders

#476299

Postby scrumpyjack » January 26th, 2022, 12:25 pm

The Persimmon 'dividend' is not a normal dividend but is billed as a Capital Return Plan with no commitment to maintain it indefinitely.

https://www.persimmonhomes.com/corporat ... -programme

It started in 2013 and was ramped up hugely, I think, to divert shareholders from their anger at the CEO's £75 million bonus!

They commit to paying 125p in July

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Re: Investing in house builders

#476317

Postby AsleepInYorkshire » January 26th, 2022, 2:06 pm

BullDog wrote:
AsleepInYorkshire wrote:
vand wrote:Large director buy at Persimmon: https://finance.yahoo.com/news/insider- ... 42062.html

I have use the recent weakness to build a position in PSN myself. Maybe a 10% dividend is too good to be true, but I'll take the chance.

I think government support for house buyers comes to a close next year?

Worth checking?

If so I think it may be a game changer

AiY(D)

With a barely covered dividend, interest rates on the increase and the government seemingly gunning for the builders to cover as yet unknown remediation costs on tens of thousands of apartments - Persimmon look like a dividend cutter in the making to me.

Add to that

1. Skills shortages & labour inflation
2. Extraordinary materials inflation
3. Increased reductions in Co2 omissions

A perfect storm?

AiY(D)

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Re: Investing in house builders

#476319

Postby scrumpyjack » January 26th, 2022, 2:12 pm

I suspect the market thinks the biggest risk for housebuilders in a sharp rise in interest rates reducing the amount buyers can borrow and triggering a fall in house prices. Such falls have happened in the past and sometimes even dented the 'ladder' delusion whereby people think house prices can only ever go up.

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Re: Investing in house builders

#476325

Postby BullDog » January 26th, 2022, 2:30 pm

scrumpyjack wrote:I suspect the market thinks the biggest risk for housebuilders in a sharp rise in interest rates reducing the amount buyers can borrow and triggering a fall in house prices. Such falls have happened in the past and sometimes even dented the 'ladder' delusion whereby people think house prices can only ever go up.

Indeed, there's massive unaffordability problem. Even in what is not an expensive part of the world here, a one bedroom apartment is around £200,000. Typical salary, sub £30,000. Add in to that student debt, imminent huge energy price increase, increased taxation, car ownership/lease, pension savings........ The numbers don't really add up. It's been a long time coming. But a big drop and/or long term stagnation in property prices has to happen. Doesn't it? The present situation does not seem sustainable to me.

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Re: Investing in house builders

#476523

Postby stevensfo » January 27th, 2022, 11:52 am

BullDog wrote:
scrumpyjack wrote:I suspect the market thinks the biggest risk for housebuilders in a sharp rise in interest rates reducing the amount buyers can borrow and triggering a fall in house prices. Such falls have happened in the past and sometimes even dented the 'ladder' delusion whereby people think house prices can only ever go up.

Indeed, there's massive unaffordability problem. Even in what is not an expensive part of the world here, a one bedroom apartment is around £200,000. Typical salary, sub £30,000. Add in to that student debt, imminent huge energy price increase, increased taxation, car ownership/lease, pension savings........ The numbers don't really add up. It's been a long time coming. But a big drop and/or long term stagnation in property prices has to happen. Doesn't it? The present situation does not seem sustainable to me.


But a big drop and/or long term stagnation in property prices has to happen. Doesn't it? The present situation does not seem sustainable to me.

I've been saying the same for about 20 years now! 8-)

Steve


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