Monday 17 December 2018

Hedge funds short shares in UK builders as Brexit bites

Stock photo
Stock photo

Sharon Smyth and  Suzy Waite report

Once bitten, twice shy? Not in the case of the hedge funds that are shorting UK homebuilders, even after the strategy burned some of their peers in the wake of the Brexit vote.

Firms including Millennium, Marshall Wace and Janus Henderson Group are raising bets against an industry that's key to Britain's economy. This comes amid waning optimism about the UK government's ability to prop up the market with incentive schemes as well as fears that the UK's looming departure from the European Union will hurt real estate.

"House prices now seem to be stagnating and margins are likely to plateau in the short term," said Colin Sheridan, an analyst at finance firm J&E Davy Holdings. Though the government's Help to Buy programme is boosting the market, homebuilders' earnings will be muted this year, he said.

Hedge funds will be hoping that their wagers against companies such as Bovis Homes Group Plc, Taylor Wimpey Plc and Berkeley Group Holdings Plc don't turn out to be premature - as many were in the run-up to the EU referendum.

Odey Asset Management was bearish going into the June 2016 vote, but the double-digit gains achieved in the days following the result were soon wiped out.

This happened as the Stg£7.1tn ($9.8tn) housing market was buoyed by a lack of supply, while UK stocks barely paused for breath before resuming a surge fuelled by cheap money and a weak pound.

Cracks appear

Now, though, the bears reckon their time has come.

An imminent interest-rate hike is widely seen as likely to dampen demand in the real estate market.

London home prices are currently falling at the fastest pace since the depths of the recession almost a decade ago, with the most expensive districts seeing the biggest declines, research firm Acadata said in a statement last Monday.

Average prices fell to Stg£593,396 ($820,000) in January, an annual decline of 2.6pc, according to Acadata on Monday. That's the most since August 2009.

The city will be the weakest performing market in the country over the next five years, said Lucian Cook, head of residential research at broker Savills Plc, as a decade of soaring prices means London's more exposed to political and economic uncertainty, the prospect of interest rate increases and mortgage loan limits.

Weakness in prime property in the UK capital in recent years - partly due to tax changes - is rippling out to other locations in the city and around the Southeast.

Business has been slow in "a lot" of offices since the start of the year, though there are more deals being done in some central outlets, Simon Aldous, a director at Savills, said in a survey published last week by the Royal Institution of Chartered Surveyors (RICS).

Offers for homes are often more than 10pc below asking prices, James Gubbins, a partner at Dauntons in Pimlico, said in the poll. "Uncertainty over Brexit is the issue," Gubbins said.

London's highest-priced boroughs were the biggest losers over the last year, while the largest single drop was recorded in Wandsworth, down almost 15pc.

The borough has seen a sharp surge in the number of expensive apartments being built there that Londoners don't want or can't afford.

Increased taxes on landlords and loan limits in Singapore have also helped to damp demand from overseas, leading to a record number of homes under construction in the UK capital that have yet to find a buyer.

Nationally, slower economic growth and faster inflation since the Brexit vote are weighing on the market, while the Bank of England is raising interest rates, adding to the downward pressure.

Media coverage of the slowdown, including headlines about falling house prices, is making consumers nervous and holding back demand.

New buyers registering with real-estate agents fell for an 11th month in February, RICS said last week.

Short sellers strike

Short sellers can try to profit from this by selling borrowed shares in homebuilders and buying them back, hopefully at a lower price, and pocketing the difference.

"Brexit will probably put pressure on construction costs," said Neal Hudson, founder of research firm Residential Analysts, adding that homebuilders are still producing substantial profits at present.

"There's increased government concern about land banking and delivery rates, which could lead to intervention in the market. Meanwhile, it looks likely that interest rates will continue to slowly rise. That will put pressure on affordability and may reduce demand for new homes," Hudson added.

Here are some of the short positions, based on data from the UK's Financial Conduct Authority:

Ω Marshall Wace has boosted its short against Berkeley Group to the highest since the EU referendum, in terms of the percentage of outstanding shares.

Ω Millennium's bet against Bovis Homes has now reached the highest by the same measure since May 2017. The firm increased a wager against Taylor Wimpey to the highest, in those terms, in more than a year.

Ω Janus Henderson funds have new shorts on Flintshire, Wales-based Redrow Plc and Crest Nicholson Holdings Plc, based in Surrey, southern England. They're worth about $43m combined.

Ω Janus Henderson has also upped a short bet against Barratt Developments Plc to around 1.5pc of outstanding shares, the most since last March.

Spokesmen for Odey, Millennium, Barratt and Redrow, and spokeswomen for Marshall Wace and Janus Henderson, declined to comment. Spokesmen for Crest Nicholson, Taylor Wimpey, Bovis and Berkeley weren't available for comment.


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