Questor share tip: Housing stocks creaking under Brexit uncertainty

The state of the market

Taylor Wimpey had a lot going for it: a solid presence across the country, 7.5pc sales growth last year and a penchant for special dividends.

The firm makes around a third of its sales in London and the South East, and relied upon the Government’s Help to Buy scheme to subsidise mortgages for 37pc of its customers last year.

Taylor Wimpey is not the only housebuilder propped up by Help to Buy, and it’s not even the most aggressive in this slice of the market. Persimmon, for example, sold 6,110 of its 10,043 homes last year to customers with Help to Buy mortgages, while Barratt Developments reported that 31pc of its sales relied on the scheme.

However, both the international London market and first-time buyers are now particularly vulnerable to the economic lurches that Brexit brings. Analysts at Liberum said that slowing economic growth, rising long-term interest rates and political uncertainty “is like Kryptonite” for housing stocks.

Forecasters have already lowered their outlooks. The CEBR think-tank still expects prices to rise 4.5pc this year, down from a 4.9pc growth prediction before the referendum,

Even before the outcome of the vote, Berkeley Group had sent a chill through the market earlier this month by suggesting that reservations were down 20pc on uncertainty about the referendum. This warning was followed by official figures showing a 13.8pc fall in house sales in May compared to a year ago, partly because many rushed to sell in March ahead of a new 3pc stamp duty on second homes.

Supply problems

Taylor Wimpey has a land-bank of about 76,000 plots, but how quickly will it convert that potential into cash flows?

The ability to supply the housing market with more stock could also be at risk. The CEBR think-tank estimates that one in 20 construction workers come from other EU countries, who came to fill an acute skills shortage in the British building industry.

Their right to work in the UK could be limited or removed, depending on the terms of Britain’s exit from the EU, which is at least two years away. Even if their status is unchanged, the uncertainty could prompt many to leave the country for a more stable region.

Rising house prices have so far outstripped growing labour costs, which were expected to increase by 4pc this year. A crash in prices could turn this on its head.

Economic gloom

The swaps market is now pricing in a 15pc chance of UK interest rates turning negative over the course of the next year, according to Hargreaves Lansdown, signalling a period of weak economic growth and uncertainty for the housing market.

Taylor Wimpey has fortified its balance sheet to hunker down in the event of a downturn, having cut its net debt to £94.8m last year and doubled its net cash to £223.3m, even as it paid a £308m special dividend. The firm also enjoyed an operating profit margin of 20.3pc last year, meaning prices would have to take a substantial dive before it swings to a loss.

So the company seems capable of weathering economic headwinds. For now, though, the market is ill-equipped to price property stocks given so many uncertainties about supply, demand and the overall economy. Avoid.

Foxtons

£1.04       -30.5p

Questor says         SELL

Foxtons’ profit warning meant the estate agent was also in the dumps on the market, losing 22.6pc and leaving the firm at its lowest ever closing price. The heady days when the stock was pushing £4 less than a year after the initial public offering in September 2013 seem like a distant memory.

Peel Hunt analysts were particularly gloomy about the firm, saying its annual profit forecast of £42m could be halved, and that even a recovery in the London market would not be enough to revive the estate agent when its competitors are eager to undercut it on commission.

The Questor column advised selling in March, after Foxton posted a 2.6pc fall in annual profits as cheaper rivals sprang up across its London heartland.

The firm has previously managed to balance falling sales with the growing lettings market, but this equation no longer works if there is a broader draining of activity from the capital city. We see no reason to take the plunge, even at the current rock-bottom price. Sell.