Callum Abbot JPM

Written by Callum Abbot

July, 2021

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The long and short of it: Review of the markets in June

We, like most of the UK it seems, recently moved house. We only had one sofa in our old flat, a pre-child purchase… in midnight blue velvet. Needless to say, it is covered in milk, yogurt and general baby/toddler related mess, so we’ve decided to treat ourselves to a new one. We spent several weeks deciding on which model and fabric, including handing our toddler a swatch of contender fabrics at breakfast time to check for robustness. It was then, as we completed the order, that we saw the guided lead time was 18-20 weeks! We’ll be making do with the grubby velvet sofa for now.

It’s not just my anecdotal evidence that suggests consumer spending, and housing related spend is high. DFS reported earlier in June that their Q4 (they have a June year-end) order intake to date was +92% vs FY19 and their guidance scenarios were around 33% ahead of market expectations (source DFS Plc).

Rightmove, the property portal, published a survey, which stated there were over 700,000 properties going through the conveyancing process, the highest figure in a decade. With the stamp duty holiday due to start tapering down at the end of June, it could be interpreted as a huge rush to get things done in time. However, the survey suggested just 29% of buyers were expected to make the June stamp duty deadline and only 4% said they would abandon the purchase if they missed it. The most popular reasons for moving were to relocate to the coast/countryside and to have a garden rather than to save money on stamp duty.

Year to date UK housing transactions are 33% ahead of the 2015-2019 average (source HMRC) and while there has been a slowdown in June, indications are that transactions will remain above trend for the remainder of the year. In fact, the May RICS (Royal Institution of Chartered Surveyors) Survey suggests the recent slowdown is not being driven by declining demand but rather by supply; new buyer enquiries are +32% m/m versus new instructions -23% m/m – the widest gap since November 2013. The Rightmove House Price Index noted the number of properties on agents’ books is at record lows.

What to conclude from all this?

Basic economics tells us that lack of supply and strong demand drive prices higher. In the housing market this needs to be facilitated by affordability. Interest rates have creeped up from the lows, but a quick glance at a comparison website will show you can get an attractively priced 2-year fix with a 20% deposit for around 170bps (source USwitch). It is hard to know whether higher pricing will draw in greater secondary supply and over what time period this could happen. However, higher prices are supportive of listed housebuilders, which are the only companies bringing material volume to the market.

The data also suggests there is thematic change about what buyers want from a home. Demand is being driven by this change in requirements and not by the opportunity to save on stamp duty. This could be a lasting theme that plays out over years and sustainably drives higher transaction volumes than we’ve seen in recent years. If this is the case, then all those sectors and companies that thrive on housing transactions and RMI (Repair, Maintenance and Improvement) spend should be well placed to benefit assuming they can pass on cost inflation to the consumer.

The thing that nags at me, is that we all think we’ll be working from home more, but how much more and how much commute can people stand? It’s easy to buy a house in the middle of the countryside and tell yourself you don’t mind living further away from a train station and commuting an extra hour because you’ll only be doing it a few times a week. However, until you are doing that commute to the tune of your new regular hybrid work schedule it is very difficult to know for sure.

Personally, I do think the housing market will remain buoyant for a few years as this theme drives transactions, but I’m not one to write off urban living, particularly as reopening continues and all the wonderful benefits of cities become accessible again.  

The Long

Bellway. A UK housebuilder that has plenty of capacity to grow volumes and expand margins over the next few years. For the twelve months to the end of July 2021, Bellway has guided to 10,000 homes, but it has capacity to build up to 14,000 homes in the medium term. After a challenging year for margins -due to a number of Covid-19 costs and other cost headwinds that now look under control – there is scope to materially increase margins as they grow volumes.

The Short

TUI. We were short Tui going into the pandemic but closed it mid-March 2020 as we felt it was unlikely the company would go bust, which was what the price was implying. Since closing the position the share price has roughly doubled and the balance sheet ballooned. Yet, it looks like it could be another tough year for this holiday company and the current valuation does not seem to reflect the uncertainty around holidays this summer or the state of their balance sheet. The current market cap is similar to where it was pre Covid (end January 2020) and the enterprise value is c.13% larger (stripping out leases). Given the proliferation of the delta variant in the UK, which will likely spread to other parts of Europe, summer holidays may be delayed another year for many. The balance sheet needs cash inflows soon, or other forms of cash raising are likely to be required.


Rightmove House Price Index:

Rightmove Survey:

RICS Survey:

UK Housing Transactions

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