The housing market has been throwing offmixed signals lately, as has every other economic indicatorsince Brexit. So what is the outlook for these two property stocks?
Ton of bricks
House builders BerkeleyGroup Holdings (LSE: BKG) and Persimmon(LSP: PSN) were hit hard by the shock referendumresult. Their share prices crashed and, unlike many other FTSE companies, they have largely missedthe post-Brexit bounce. Today, Berkeley trades at 2,351p, some 28% lower than its pre-referendum price of 3,285p. Persimmon has picked up slightly in recent weeks, but at1,691p is still 17% lower than on23 June.
The market assumption is that Brexit will hit UK economic growth and housing market demand, which in turn will hit the house builders. So far, that hasnt happened. In fact, the referendum hasmadeit cheaper to borrow money and buy a property, thanks to the Bank of Englands 0.25% August rate cut. Yorkshire Building Society has just launched a record low deal charging just0.98%, although only for remortgages.
House price crash dashed
LatestBank of England figures show mortgage approvals hit a three-month high in September.The Office for National Statistics recently put the value of the average home at 219,000,up8.4% in a year. There may be somesigns of slippageat the top of the prime central London market, but generally, the UK market remains in robust state.
That may change whenPrime Minister Theresa May actually triggersArticle 50 and Brexit begins in earnest, but for nowhouse prices have been faring far better than house builders share prices. This is either a case of the stock market overreacting, or else being more far-sighted.
It aint all Brexit
Berkeley has being hit by its greater exposure to the London market. However, it has reported that viewings and reservations have picked upafter a wobble around the time of the referendum. The dip may partly be down to Berkeleys decision to defer releasing new product to the market at that time. Othernon-Brexit factors may also have played a role,such as the buy-to-let tax hikes made by former Chancellor George Osborne.
Persimmon hasresponded to Brexituncertainty by announcing that it will spend less on new land, andfocus more on developing its existing land bank, where it has enough supply to last for six years. Its caution is perhaps wise given current uncertainty, although it maydisappoint more bullishinvestors.
Crazy days
House-building stocks have been on a tearsince the post-crisis lowsof March2009, driven by record low mortgage rates and surgingdemand from a spiraling population. Persimmons share price is still 235% higher than five years ago. In that respect, it was due a fall. This has left Berkeley and Persimmontrading at tempting valuations of 8.88 and 9.91 times earnings, respectively. Berkeleys forecast yield hashit a crazy 8.4% but cover of 1.9 suggests it could be sustainable. Persimmons yield is a forecast 6.4%, with cover at 1.7 times.
Years of double-digit earnings per share growth are expectedtocome to a juddering halt next year for both companies, so there will clearly be sticky times ahead. Mortgage costs can scarcely go much lower, and could even start rising. However, many will consider these risks are reflected in bothcompanies lowly valuations and dizzying yields.
Don’t fret about Brexit
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Still, it is early daysand if Britain does slide into recession the turbulence will return with a vengeance.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Berkeley Group Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
