The UK property market is in a bad way. Just take a look at the huge falls among housing-related firms...
After a few months of falling house prices, the UK property downturn is already seriously damaging our wealth.
If you don't believe me, just ask the private shareholders of former building society Bradford & Bingley. These tortured owners have seen the share price of the UK's biggest buy-to-let lender fall from a high of 536p in 2006 to just 69p today (in the early afternoon of 11 June). In other words, the value of their windfall shares has fallen to just an eighth of its peak, down 87%. Disaster!
However, one swallow does not a summer make, so let's see how other major property-dependent firms have fared...
1. It's been brutal for bank shareholders
As you can see from the table below, the owners of Britain's eight listed banks have lost tens of billions of pounds as share prices have plunged (sorted by share-price fall):
Bank | 2006-08 high (p) | Current price (p) | Change | Fall in value (£bn) |
|---|---|---|---|---|
Bradford & Bingley | 536 | 69 | -87% | 2.9 |
HBOS | 1167 | 296 | -75% | 33.3 |
Alliance & Leicester | 1248 | 338 | -73% | 3.8 |
Royal Bank of Scotland | 675 | 226 | -67% | 45.9 |
Barclays | 790 | 316 | -60% | 31.1 |
Lloyds TSB | 614 | 346 | -44% | 15.4 |
HSBC | 1028 | 837 | -19% | 23.6 |
Standard Chartered | 1960 | 1617 | -18% | 5.0 |
Total | 160.9 |
Source: Company REFS
To a greater or lesser degree, all of the above banks have suffered from their exposure to toxic US subprime mortgages. Nevertheless, my table clearly shows that the banks with the greatest appetite for UK mortgages have suffered most. Thanks to an ongoing credit crunch, the mortgage market is in meltdown, so this comes as no surprise.
At one end of the scale, we have global giant HSBC and Asian bank Standard Chartered, whose shares are down less than a fifth from their peak. At the other end, we have specialist lender Bradford & Bingley, HBOS (the UK's largest mortgage lender) and aggressive lender Alliance & Leicester. Shareholders of these building societies-turned-banks have suffered severe losses, with shares standing at a fraction of their former highs.
By my reckoning, the banks' plunging share prices have destroyed £161 billion of shareholder wealth. The largest losses have been suffered by the shareholders of two banks with Scottish links: HBOS (down £33 billion) and RBS (down £46 billion). What's more, because four of the above banks were once building societies (plus Barclays, which bought the Woolwich), this pain is shared by millions of private shareholders.
Indeed, I never thought I'd see Asian bank Standard Chartered worth twice as much as HBOS, the UK's largest mortgage lender. Likewise, it's incredible that Goliath HSBC is now worth more than its seven rivals put together. So, if any bank rescues are required, HSBC must be the white knight. We live in interesting times!
2. Housebuilders and construction firms are sinking
As you'd expect, things look even more gruesome at the `bricks and mortar' end of the stock market. With new-home sales slumping to a thirty-year low, here's a snapshot of the carnage in the housing and construction sector (sorted by share-price fall):
Company | 2006-08 high (p) | Current price (p) | Change | Fall in value (£bn) |
|---|---|---|---|---|
Barratt Developments | 1289 | 67 | -95% | 4.5 |
Taylor Wimpey | 519 | 54 | -90% | 5.5 |
Redrow | 727 | 145 | -80% | 1.2 |
Persimmon | 1543 | 370 | -76% | 4.6 |
Bellway | 1690 | 438 | -74% | 1.9 |
Bovis Homes | 1204 | 313 | -74% | 1.5 |
Berkeley Group Holdings | 1938 | 679 | -65% | 2.3 |
Total | 21.5 |
Source: Company REFS
With the sale of new homes down seven-tenths (70%) in some areas, it's no wonder that two housing firms have joined the "Minus 90% Club". However, if the `nuclear winter' in the mortgage market continues, more firms will be nursing losses of 90%+. Indeed, the value of Persimmon, the only housing firm in the FTSE 100, has dived so far (down £4.6 billion) that it is set to lose its place in the blue-chip index. Thus, it will be relegated to the FTSE 250 later this month.
Substantial falls in the value of land and properties would inflict further serious damage on these firms. Builders could be forced to make huge write-offs on the value of their portfolios which in turn could lead to them breaching their banking covenants. Then we might see emergency share issues so that the firms could shore up their balance sheets.
Finally, how bad will it get if the housing downturn continues for the two years which most economists predict? What if the slump lasts five years, as the last housing crash did? I fear that many of the above firms would struggle to survive without begging for emergency cash from investors. Indeed, there's a good chance that some may go to the wall or end up in the hands of their bankers.
In summary, these are bad times, but I fear the worst is yet to come...
Footnote: Alliance & Leicester and Persimmon will be relegated from the FTSE 100 to the FTSE 250 on June 23rd. Redrow will drop from the FTSE 250 into the FTSE SmallCap index.
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