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Housebuilders face tough times ahead, according to Cholwill

Friday, 25 April 2008

Martin Cholwill, manager of the Royal London Equity Income Trust, believes that, after years of buoyant trading helped by plentiful cheap credit and a belief amongst many that house prices could only go up, housebuilders face tougher times ahead. Today's gloomy trading statement from Persimmon, revealing a 24% drop in sales, adds further credence to Cholwill's long-held view. He points to several key factors at play:

  • Taylor Wimpey's recent downbeat trading update confirmed the housing market is in very poor shape and at the eye of the credit storm.
  • Next few months set to be a difficult period for housebuilder share prices, despite the share price falls already seen.
  • Many balance sheets are just too weak, such as Barratt whose debtfunded purchase of Wilson Bowden now looks ill timed. Taylor Wimpey is heavily exposed to the ailing US and Spanish Costas housing markets.
  • Even those trading close to book value could have further downside; land values just reflect future expectations of house prices and those holding land, paid for through borrowed money, could yet be forced sellers if the credit crisis persists.
  • Cashflow management will be critical for housebuilders.
  • Credit conditions make cash takeovers in the sector look unlikely.
  • Book values will wilt at least as quickly as house prices fall.

Cholwill sold all his holdings in housebuilders last summer and believes it is still too early to buy back into the sector as the full consequences of banks repricing risk are yet to be seen. Debt will continue to be more expensive for many homeowners, especially first time buyers. Although first time buyers will struggle to find finance in the short term, the silver lining may be that those who are patient could find their money goes a lot further in a year's time when house prices have lost their froth and corrected back towards their longer term norms.

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For further information:

RLAM
Stephen Watchorn
Tel: 020 7506 6582
Stephen.watchorn@rlam.co.uk

Quill Communications
Jo Stonier
Tel: 020 7758 2230
Jo.s@quillcommunicate.com

 

Editor's notes:

Royal London Asset Management (RLAM)

was established in 1988 and specialises in providing investment management solutions for both the Royal London Group and a range of external institutions. These include FTSE 250 companies, local authorities, universities, charities, wealth managers, financial advisers and private clients. RLAM manages over £31bn of assets, employing more than 50 experienced investment professionals in our London based office.

Royal London Group

is a specialist financial service provider. Its businesses focus on those sectors of the market which value premium propositions, operating through a number of brands:

  • Scottish Life – UK pensions market
  • Bright Grey – UK protection market
  • Scottish Life International – offshore investment markets
  • RLAM – fund management
  • RLAS – life and pensions administration
  • Fundsdirect / Ascentric – funds supermarket; Wrap Platform

Royal London is the largest mutual life and pensions company in the UK with Group funds under management of £33.1 billion. Group businesses serve around three million customers and employ 2,620 people. (Figures quoted are as at 31 December 2007).