Should You Hold Real Estate Stocks After the End of Furlough Scheme?

Summary

• With the escalated demand for the new houses, the average price of a house in the UK has swelled to an unexpected level
• The UK’s largest building society has warned of a sharp slowdown indicating consolidation in the house prices going ahead with the end of stamp duty subsidy
• A possible downturn in the house prices will be likely reflected through the share price performance of real estate companies

The real estate market in the United Kingdom has been quite volatile in the present calendar year with the average house prices in the nation touching a record high mark. The number of first-time homebuyers and other people seeking a bigger home has increased considerably following the furlough scheme, the removal of stamp duty on houses priced under GBP 500,000 and other stimulus measures announced by the government. 

With the escalated demand for the new houses, the average price of a house in the UK has swelled to an unexpected level. Meanwhile, the rush of first-time homebuyers after the withdrawal of stamp duties have also contributed to the price rise of new homes. 

Rising house prices and concerns around it

According to the latest data released by the government for August 2020, the average price of a house in the UK has surged by 2.5 per cent annually to £239,196, while there has been an increase of 0.7 per cent in the average house price between July and August as against a 0.3 per cent growth in the same period of the previous year. The average house prices in England have, undoubtedly, seen the strongest surge in August across the country with an annual increase of 2.8 per cent.

On the other hand, the Swindon-headquartered mortgage lender Nationwide Building Society has said that the house prices in the UK have grown at the fastest annual pace in the month of October. 

As per the data released by Nationwide, the average prices of a house in the UK have registered a rise of 5.8 per cent to £227,826 as against the figures of a similar period in 2019. The average prices of houses have been seasonally adjusted on a regular basis. The UK government-published house price index indicates an average price of £232,944 in October 2019. 

However, the UK’s largest building society has warned of a sharp slowdown indicating stability in the house prices going ahead with the end of stamp duty subsidy. The stamp duty holiday, set to discontinue from March-end, has tailored a short-term boom in the housing market of the UK. 

With such stern caution from Nationwide and the termination of the furlough scheme from 31 October, there is a strong likelihood of correction in the house prices. Moreover, the steep annual surge in house prices in October can be possibly due to a rush before the end of furlough scheme and a relatively lower denominator, post-seasonal adjustments, in the same month of the previous year as compared to the August and September. 

Investment in housing stocks 

As far as the investment in housing stocks and the shares deriving their respective values from the housing market, mortgage lending, property development, real estate developers etc. have been affected with the not-so-stable housing market of the UK. A possible downturn in the house prices will be likely reflected through the share price performance of real estate companies after the end of the furlough scheme. 

Most of the real estate stocks listed on FTSE have not registered a promising year-to-date (YTD) performance with many of them still hovering in the negative territories even after the headline indices bounced back sharply. We take a look at this year’s performance of some FTSE-listed real estate stocks.

Shares of Segro Plc (LON:SGRO), the London-based property developer, have recorded a steep rise after the coronavirus pandemic-led correction but the shares are still in red on a YTD basis. The stock of Segro has nearly surged 35 per cent to GBX 892.80 (29 October). Segro share price plunged approximately 27 per cent to the yearly closing low of GBX 659.40 on 19 March.

Stock Performance: Segro Plc

(Source: Thomson Reuters)

Shares of another London-headquartered real estate developer Land Securities Group Plc (LON:LAND) have been largely falling since the beginning of this year despite a few smaller upticks. The stock of Land Securities has already fallen 49 per cent to GBX 505 from a share price level of GBX 994 as on 2 January. 

Stock Performance: Land Securities Group Plc

(Source: Thomson Reuters)

Other major FTSE-listed shares that are oscillating in the negative territories on a YTD basis include British Land Company Plc (LON:BLND) (down 45 per cent), Great Portland Estates Plc (LON: GPOR) (down 33 per cent), Hammerson Plc (LON:HMSO) (down 87 per cent), Helical Plc (LON:HLCL) (down 32 per cent), Savills Plc (down 28 per cent), Unite Group Plc (LON:SVS) (down 35 per cent) and UK Commercial Property REIT Ltd (LON:UKCM) (down 24 per cent), while the stock of Tritax Big Box REIT Plc (LON:BBOX) (up 4 per cent) has been one of the real estate shares that is trading in positive territory. 

Persisting worries 

The coronavirus pandemic-led uncertainty has infused a never-seen-before anxiousness among the market participants, as well as the retail investors. With the fresh set of restrictions imposed by the UK government in the recent past, most of the small-to-large scale enterprises are fearing a weak business activity in the months to before Christmas and the year-end festivities. 

The aftermath of Covid-19 has affected who’s who of the business giants, therefore, a sizable downfall in the wages of middle-income earners can be definitely estimated. However, a large section of people, mostly dependent on a single source of income, have received enormous support from the taxpayers’ net through various government-backed schemes such as the furlough scheme. Once the support schemes are removed, it would undoubtedly start making an impact on the businesses as well as the common people.