THE CITY'S attitude towards house builders seems to be thawing. Two of the sector's major players, Taylor Woodrow and Berkeley Group, have raised new funds from investors in recent weeks, helped by generally positive trading statements.
Since early December the sector has outperformed the stock market by more than 10 per cent. According to broker Schroder Salomon Smith Barney (SSSB), the trend can be expected to continue in the coming quarter.
Last week, the broker highlighted shares in four house builders, Berkeley Group, Westbury, Wimpey and Barratt, which it expects to perform well in the near term.
Part of the attraction is the recent strength in consumer confidence with house price inflation and mortgage lending remaining strong in the latter part of 2001 and unemployment staying low.
With the prospect of 6-8 per cent earnings growth for many companies this year, house building shares are also cheap. Most trade on price/earnings ratios of 6.5-7 times, which compares with a FTSE average of about 20 times.
After the recent wave of mergers in the sector, particularly the Bryant/Taylor Woodrow and Persimmon/Beazer combinations, the industry is reckoned to be better managed. According to SSSB, the sector deserves to be more highly rated through this cycle than in previous ones.
The main danger facing the sector is the prospect of rising interest rates later this year, which always tends to cool investor sentiment.
Housing reservations in the second and third quarters will struggle to match the strong figures seen in the middle of 2001 and affordability may also become a problem. If interest rates were to rise to 7 per cent, the broker says affordability would be as weak as in the late1980s.
As ever, timing is the key. Investors are urged to increase their weightings to capture the expected outperformance of house building shares in the first half but reduce them in the second and third quarters.