🆙 House Prices Jump Again! Can they Rise Further?
In a busy week for property stocks, the good news continued to flow. House prices grew at their fastest rate in 18 months, showing further green shoots. But there could be more than meets the eye.
Hello there, I'm John Choong. Every week, I dig into the financial world's nitty-gritty with three in-depth segments. Here, I spill the beans on the latest macroeconomic data, news, and even offer a share tip or two. Join me as I dissect this week’s drama.
🗞️ This Week’s Highlights
🎙️ Check out my rizz: I joined renowned mortgage broker Riz Malik on his podcast, Riz Talks Money. We discussed our outlooks on the housing market in 2024, and I even threw in a couple of special insights you can’t find here.
🩼 Weak foundations: The latest Halifax data from January showed that the average house price grew at its fastest rate since June 2022, but the strong momentum may come to a slowdown if inflation doesn’t abate as anticipated.
🫱🏻🫲🏼 Barratt and Redrow build a partnership: In a shock move, Redrow opted to merge with Barratt for £2.5bn, as the two housebuilders look to take on the big boys for market share. But the main question here is, who wins?
🏨 A premier investment?: With the travel industry still booming, many retail investors are paying most of their attention to airlines. Whilst there are certainly opportunities in that space, travellers also need rooms to stay in.
📊 Markets This Week
📉 FTSE 100: 7,572 (↓0.56%)
🇬🇧 FTSE 250: 19,057 (↓0.59%)
🧾 5-Year Yield: 3.966% (↑4.81%)
💵 GBP/USD: $1.26/GBP (↑0.05%)
🎟️ Whitbread: 3,484p (↓0.88%)
🩼 Weak foundations
Last week, I said that the housing market crash is cancelled. For the most part, this looks to be true after this week’s Halifax and RICS data further enforced my case. The nation’s biggest lender reported a whopping 1.3% increase in the average house price in January — the biggest month-on-month jump in 12 months, with prices also 2.5% higher than the same period last year.
Meanwhile, the RICS survey showed a headline reading of -18%, up from December’s -29% and marking the fifth consecutive month of a recovering read, as estate agents expect sales volumes to continue recovering throughout 2024. More importantly, metrics such as new instructions, agreed sales, and buyer demand, all turned positive, some of them for the first time in almost three years.
Not only did these figures beat estimates, they smashed them. But whether this momentum can continue in the proceeding months is something even optimists like myself should properly consider, and here’s why.
Whilst it’s more likely than not that the Bank of England’s (BoE) next move will be a cut, the main catalyst that has been driving up house prices over the past couple of months has faded, at least for the time being. What’s this catalyst, I hear you ask? Rate expectations. You might’ve noticed that since the BoE opted to hold rates steady at 5.25%, mortgage rates have been on a decline. But how can this be?
Well, this is because the bulk of lending is mostly dictated by financial markets. This means that 'real' interest rates are mostly decided by what markets expect rates to fall to. In simpler terms, if markets expect rates to fall to 4% in two years’ time, gilt yields might be priced around that range; this has been the driving force behind the recent uptick in house prices.
However, that decline has reversed in the past couple of weeks, as the gilt yields have been heading higher. Consequently, lenders such as Nationwide and NatWest have repriced their rates upwards. This has come on the back of a hawkish BoE and fears that inflation may not stick at 2% beyond Q2, leading to the market anticipating a ‘higher for longer’ rate cycle.
Therefore, the foundations that the recent house price rally has been built on, aren’t exactly the most steady. Next week’s inflation data may open a can of worms, with headline CPI expected to increase again, to 4.2%, as per consensus. If inflation does come in as expected or God forbid, higher than 4.2%, it could derail the current optimism in the housing market very quickly.
Despite the likelihood of inflation ticking up for a second month in a row, however, the general consensus remains that inflation will hit the BoE’s 2% target by April, and that may be enough to stop mortgage rates soaring back to their highs. But what comes after that is what I encourage investors to pay most of their attention to.
Like I said in last week’s newsletter, second-round effects from higher minimum wages and increased demand from higher pension incomes could stoke inflation back up above 2%. Thus, I’d argue that the more important metrics to watch for next week will be average weekly earnings and core CPI. A downward trend in both metrics may provide some further relief, especially if they come in below consensus (more below).
For now, though, there are some points of encouragement that indicate that a further decline in wages and services inflation can be expected in the months to come. This week’s finalised PMI services data confirmed that input inflation hit its lowest rate since October. Additionally, the KPMG/REC jobs report showed that permanent salary inflation slipped to a 34-month low. Let’s just hope it keeps sliding.
🫱🏻🫲🏼 Barratt and Redrow build a partnership
In the name of addressing the everlasting housing shortage in this country, Barratt is merging with Redrow for £2.5bn to take on the housebuilding cartel competition. But instead of forking out cash (something it can’t afford to do with only £950m in the bank, and pre-tax profits crashing 70% to £157m), it offered Redrow shareholders 1.44 new shares for every Redrow stock. Good deal? Let’s explore.
According to Barratt CEO David Thomas, the deal has the “uniquely compelling opportunity to create an exceptional UK homebuilder”, and part of this will be achieved via everybody’s favourite word whenever a merger occurs — synergies. Thomas estimates at least £90m per year can be saved by the end of the third year, and plans to build roughly 22,000 homes a year, amounting to revenues of c.£7.5bn.
The 1.44-to-1 offer implies a huge premium for the Redrow share price, which is why investors in the sixth-largest housebuilder leapt with joy, as Redrow shares jumped by a handsome 14.2% to finish the week. On the other end, Barratt investors gave the merger a thumbs down, dropping the shares by 7.0%. What a turn of fortunes.
Why aren’t Barratt investors feeling too jolly about this whole merger then? On paper, it looks like a good deal. After all, there aren’t many overlaps in geographical coverage and price range, so if anything, it gives the group more market share and a bigger competitive advantage. Nonetheless, I found a potential reason as to why this merger has been a no bueno for Barratt shareholders.
Taking Redrow’s closing price on Tuesday, Barratt offered buying the builder for a premium of 15.2x its forward earnings. Although this is in line with the industry, the premium falls short when you consider Redrow’s earnings potential against Barratt’s. With a price-to-earnings (PEG) growth ratio of 0.71 from FY24 to FY27 versus Barratt’s 0.68, the difference isn’t so incredible to warrant such a premium.
The bottom line here is that Redrow shareholders are the only winners. Barratt shareholders certainly don’t feel like they’ve won, at least for now, and neither will consumers. If anything, the housebuilding sector needs more competition, not less (as much as I’m personally invested in housebuilders). More mergers will only result in more cartel-like behaviour — and that won’t resolve the housing market shortage.
I should also point out that the merger is still subject to the Competition and Markets Authority (CMA) approving the deal. Barratt is already the UK’s biggest housebuilder, so there’s a chance the authorities could end up vetoing it. But if the two companies can make a case that their newfound partnership can boost output to resolve the housing shortage while offering consumers choice, the green light may be given.
“Combining the business is going to offer a broader range of house types and price points.”
Barratt CEO David Thomas
Nevertheless, the housing supply issue doesn’t lie so much with Barratt and Redrow. Rather, it’s a wider issue with regulation and the thick amounts of red tape one has to get through in order to acquire land, let alone build on it. So, even though this merger comes with the best of intentions for all parties involved, its full potential might not be realised as long as hefty regulation continues to stifle the housebuilding process.
🏨 This Week’s Share Tip: Whitbread
Whilst many look to airline stocks to buy as travel demand continues to stay resilient, I’ve got my eye on Whitbread (LSE:WTB), the mastermind behind Premier Inn. The hotel chain continues to broaden its shoulders in the hospitality realm. Not only does the business’ cheap prices attract customers, the value proposition through its retrofitted rooms and ancillary offerings have also enriched the investment case.
With a strategic focus on expansion and optimisation, the FTSE 100 firm exhibits a resilient stance, positioning itself as a cost-of-living crisis go-to with its budget-friendly accommodations. Backed by advantageous supply conditions and a robust balance sheet, Whitbread is primed for sustained growth, particularly in its key market in the UK, but more promisingly, its growing presence in Germany.
One of the cornerstones of Whitbread's success lies in the formidable brand power behind Premier Inn. This not only facilitates lower customer acquisition costs but also yields invaluable customer data, as it’s not reliant on third-party booking websites for customers. Instead, customers come directly to the website, thereby enhancing operational efficiency and customer targeting strategies, leading to improved margins.
It is because of Whitbread's fully integrated model that the group managed to outperform its competitors. This was evident in its latest earnings report, which boasted a remarkable performance, with a notable 9% increase in revenues per available room (RevPAR).
The hotel operator’s growth trajectory extends beyond the confines of the UK as well. Premier Inn has been making significant strides in the German market, where it aims to establish itself as the premier hospitality brand (pun intended).
Its positive forward booked and a strategic plan to achieve full profitability in Germany by 2024 is something we consider the market to be under appreciating. And with commodity and raw material prices plummeting, the operating cost base should lighten up and serve as a tailwind to margins in the medium term too.
What we like about Whitbread is the board’s ability. They’ve exuded confidence and have a proven track record of navigating through evolving market dynamics while capitalising on emerging opportunities — and that’s something we’re willing to get on board with.
Even though we don’t officially cover the stock (YET!), we still see a good-value stock. Combined with a decent dividend yield of 2.4% and an average price target of 4,227p, an average upside of c.21% provides a compelling Buy case. This makes sense when looking at the multiples too, with a forward price-to-earnings (P/E) of 15.9, below its pre-pandemic average of c.35, and the current peer average of 24.5.
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🔎 What to Watch Next Week
💰 Average Weekly Earnings Growth: With the effect of one-time payments now gone, earnings growth in the three months to December should continue to fall. Markets are forecasting a figure of 5.7% and 6.0% (ex. bonuses), but pay attention to December’s median pay growth for PAYE employees. A figure lower than 6.6% will be another positive in the battle to get services inflation down.
🔥 CPI Inflation: Another increase to 4.2% is expected in the headline rate, as base effects seem to be weak enough to offset the huge drop in energy prices. Although I concede that my previous forecast of 3.8% was blindly optimistic, I still think there’s potential for a reading of 4.0%. That said, all eyes will be on the core figure, with hopes that it’ll tick down to 5.0%.
🇬🇧 GDP Growth Rate: It’s old news, but Britain may finally get its recession badge on Valentine’s Day after flirting with either side of the GDP growth divide for over a year. It’s a preliminary figure, but markets are forecasting flat growth in Q4, which could see the economy avoid a technical recession by the skin of its teeth yet again, and hopefully for the last time.
🛍️ Retail Sales Volumes: You would’ve thought that the terrible weather and the numerous storms in January would see retail sales volumes shrink. But when you consider that January’s data will be compared to a low bar in December (-3.2%), the 1.5% growth in volumes being projected isn’t a high bar to hit. But expect massive disappointment if the final figure somehow misses.