Chart that tells a story - builders continue winning streak

What does this show

It's the performance of the UK's main housebuilding companies against the broader market during the first quarter of this year. The remarkable thing about this is not so much that housebuilders have beaten the market in 2015, but that they do so virtually every year.

Why is that?

Activity in the housing market winds down towards the end of the year. Long winter nights are not conducive to viewings. House-hunters are preoccupied with Christmas. Home construction slows down. But come the spring, things start to pick up - the first quarter of the year is a key selling season for builders. It is also a period when they tend to announce either interim or full-year results, usually accompanied by upbeat assessments of current trading and prospects and increases in dividend payments. Over the past few years, the Budget has also featured measures that have proved positive to housebuilders, such as this year's Help to Buy Isa. All of which rekindles investor interest in the shares, which usually then rally.

And this year is no different?

No. Take Bellway, the Newcastle-based builder which reported record full-year profits in March. It said demand was strong not just in London, but across the country. Or Barratt; the UK's largest builder also reported record profits recently. Many of the housebuilders had near-death experiences during the financial crisis, and were forced to axe dividends and raise extra cash from shareholders to refinance their heavy debts. But they have rebounded in spectacular fashion; Taylor Wimpey shares, which fell below 10p in 2009, are now over 150p.

Surely this effect breaks down once the housing market cools?

You would think so. But it is surprisingly consistent. According to Simon Thompson at Investors Chronicle, who has written about the phenomenon for over a decade, the housebuilders have failed to beat the broader market over the first quarter in just five out of the 36 years since 1980. Those years were: 1984, 1985, 2000, 2007 and 2010. And in only five years have the builders turned in a negative first-quarter performance in absolute terms.

What about valuations?

Looking at share prices relative to book value - which in the case of housebuilders largely consists of land and work in progress - housebuilders' shares are in some cases back at pre-crisis valuations. But that disguises a major shift in business models, according to Gavin Jago, analyst at KBC Peel Hunt.

"They're carrying much less debt and there is much more emphasis on capital returns . . . they don't want to push for volume any more," he said. Persimmon, Berkeley, Taylor Wimpey and Barratt all have multiyear plans for returns of capital to shareholders. "Forecast dividend yields in the sector are as high as 5 or 6 per cent, whereas in the 1990s they would have been 2 or 3 per cent."

Many builders have capped the number of homes they will build each year, as rising volumes and rapidly escalating prices have a tendency to feed through into higher land prices, labour and materials costs - and therefore lower margins. "The returns they are making justify the valuations."

However, Mr Jago and others agree that the best of the share price outperformance may now be in the past. Charlie Campbell, an analyst at Liberum, cut ratings on several housebuilders earlier this year, saying much of the good news was already in the price.

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation