Wednesday newspaper share tips: Persimmon, property funds

Shares in house builder Persimmon have fallen more than a third since UK voted in a non-binding referendum in June to quit the European Union, writes The Telegraph's Questor column.

It placed a "hold for now" opinion on the stock, suggesting the shares could tumble further.

And yet, observed the column, the company's share-price was scarcely out of kilter with its sector's post-23 June pummelling. The house-building index have dived about 30%.

However, updates from other sector players have been largely positive -- apparently at odds with the gloom being priced into their shares by the market.

Persimmon itself reckoned it was too soon to judge the full impact of Brexit on house building.

The company was a big beneficiary of the government's Help to Buy scheme, with 42% of the homes it sold in 2015 using it.

"This policy has been guaranteed through to 2021," said Questor.

"Persimmon should also benefit from the new Starter Homes policy, which is due to begin later this year, which gives a discount of 20pc on homes to first-time buyers."

Persimmon targeted first-time buyers with entry-level family homes, and broadly steered clear of the volatile London market.

"Its homes are also non-discretionary purchases: people are buying them to house an expanding family, and demand continues to outweigh supply in these markets," the column said.

"Whatever happens post-Brexit, people will still need somewhere to live, and Persimmon is banking on that."

The column also observed that house builders were in a happier place to whether a Brexit storm than they had been in the global financial meltdown.

In particular, Persimmon's land purchases had been smart, with a long current and strategic land bank. In a crisis it also has the ability to reduce spending on land considerably to protect its cash flow.

Further on the plus side, the house builder's balance street was strong, and as such it might fulfil its long-term dividend plan of returning 900p a share to investors out to June 2021.

"The company could also benefit from lower interest levels, which would help affordability among buyers."

Neverthless, Questor noted that although Persimmon's recent trading update was upbeat it contained a cautious tone.

"The recent PMI construction survey suggests building may wind down, and three big property funds – M&G, Aviva and Standard Life – have now put a block on redemptions, signalling a lack of confidence in the sector in a post-Brexit world.

"Persimmon operates in a different part of the sector to these funds which deal in commercial property, but the contagion effect –- as all property companies are viewed en masse – may continue to impact its share price in the medium term."

Meantime, the Financial Times' Lex column has turned a spotlight on property fund Standard Life suspending trading in its flagship UK real estate fund, citing post-Brexit vote redemption requests.

This followed similar suspensions by Aviva and M&G this week.

"The funds are suspended not because of catastrophe in the commercial property market, but owing to a rush of investors trying to take their money out all at once," observed Lex.

Such en masse redemptions run down the funds' cash buffers, the column said, further adding that the trend actually pre-dated the non-binding 23 June referendum.

Investors have been concerned as much about Brexit as they have about frothy property valuations, and foreign funds inflows into UK property had slowed.

Lex noted that in 2008 funds run by Axa, Scottish Widows, Friends Provident and New Star closed to redemptions, locking up billions of pounds.

But, the column further added, there were key differences between 2016 and 2008 -- chief among them that Brexit was a regional political event rather than a global financial meltdown.

Sector leverage levels were lower now than they had been in 2008, and banks' exposure to the sector had been pared right back.

"And eight years of financial repression has boosted demand for yielding assets, especially those whose prices in dollar or euro terms have fallen," Lex wrote.

"It is harder to imagine a scenario where there are no buyers, at any price, for UK property assets."

Lex concluded that the one thing that had not changed was the unsuitability of open-ended structures for property investment.

"Ordinary investors are (again) finding out the hard way that permanent capital is the way to invest in real estate."