JPM Fund Manager

Darkest before dawn – London housing

Anthony Lynch, portfolio manager of the JPM UK Equity Plus Fund, JPM UK Equity Core Fund & the Mercantile Investment Trust, looks at the impact of Brexit on the housing market.

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Sep 07, 2018
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With stamp duty reform, Brexit and now an interest rate hike, it’s been a tough few years for London’s homeowners.

Since the 2014 peak, the average prime London property has fallen by around 10% in value, with central locations registering closer to an 18% decline. In the 12 months to February 2018, the number of transactions in London fell by 24%1. There are clearly some very different views on pricing, and at the heart of it Brexit uncertainty has caused both buyers and sellers to sit on their hands.

Prime London price movements to second quarter 2018  

Source: Savills – Prime London residential report July 2018  

This environment has made life very tough for the agents who attempt to match buyers and sellers. Last week, shares in the estate agency group Countrywide (which owns brands such as Hamptons, John D Wood and Bairstow Eves) fell by over 40% after the company announced a deeply discounted placing alongside its interim results. This latest fall brought its share price decline to over 95% since the heady days of 20142.  

For equity investors, weakness in the housing market has coupled with concerns that this cycle seems long in the tooth and that a market crash must be inevitable in the not-too-distant future. Right now, the three highest dividend-yielding stocks in the FTSE 100 and the two highest yielders in the FTSE 250 are housebuilders3.The market is screaming that the cycle is over.  

So how did we get here?  

2014: The year everything changed.  

Until 2014, life was pretty easy as a developer of homes in London. New schemes would often sell out before the first digger had even arrived onsite as developers marketed the apartments in Asia and to domestic buy-to-let investors, raising hefty deposits that could be used to help fund the construction. Many would not even bother to market the properties to domestic owner-occupiers – they would only ever buy something they had actually seen.

Then, through a series of Budgets from 2014-17, we saw stamp duty reform and various measures to disincentivise buy-to-let purchasers and owners. Progressively, the costs associated with buying a high value or second property had spiralled.

As though this wasn’t enough, the outcome of the European Union referendum struck a blow to a housing market that relies on confidence to lubricate each and every transaction. Why sell into a soft market if you don’t have to? Why buy if you’re not 100% certain that your job will still exist in 2019? After all, approximately 39% of jobs in London are held by foreign-born workers (of which 13% are from other countries in the European Economic Area)3 – and following a referendum where immigration control was one of the major campaign issues, these workers are rightly waiting to see how things play out before making such a major purchase decision.  

So what will happen after the hiatus?  

1.) There is still a demand/supply imbalance and it is not getting better.

The latest Greater London Authority (GLA) draft “London Plan” targets 60,000 new homes per year based on expected population growth, yet according to the Ministry of Housing, Communities and Local Government we are currently starting only around 20,000 homes per year.4. Furthermore, anecdotally we see that major housebuilders have materially slowed their land purchases in central London in response to this uncertain outlook.  

In reality this means that the demand/supply gap continues to grow, and this is why house prices in London have increased by over 50% versus their 2007/08 peak when much of the rest of the country is still flat-to-down5.    

2.) Brexit uncertainty will eventually clear and London will remain a hub for jobs.

Within the next seven months, we should actually get some visibility on what Brexit looks like, plus associated clarity on jobs. This could be a catalyst for transactions to pick up again and we may even see a torrent of pent-up demand. The key risk is clearly a “no deal” scenario, which could prolong the uncertainty but in the long run even this is unlikely to change the fundamentals.    

3.) The institutional private rented sector (PRS) is starting to fill the gap.  

While private landlords have been hit with stamp duty surcharges and changes to tax relief, there is growing demand from institutions, which will commit to purchase, and even pre-fund, entire sites that are purpose-built for rental.  

Build-to-rent also features in the new draft London Plan and the new draft National Planning Policy Framework, demonstrating that politicians recognise that it can be a core part of the solution to the housing shortfall.  

The worst thing for a property market is uncertainty and the worst thing for an equity market is fear. Right now the listed housebuilders are suffering from both. It’s always uncomfortable to try and catch a falling knife, but with valuations where they are and balance sheets markedly stronger than at almost any time in the past, we could in fact be facing an opportunity.

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Source: J.P. Morgan Asset Management as at 14 August 2018.

  1. Savills – Prime London residential report July 2018

  2. Bloomberg as at 13 August 2018

  3. Greater London Authority 2015 annual population survey, “London and Europe: Facts and figures” Feb 2017

  4. Telford Homes’ final results 30 May 2018

  5. Savills – UK housing market update Aug 2018

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Go to the profile of Anthony Lynch

Anthony Lynch

Portfolio Manager, J.P. Morgan Asset Management

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