Private Investor: House-builder limbo - how low can they go?

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The Independent Online

I don't have much time for angling, in any sense, I'm afraid, but I'm always up for a bit of bottom fishing in the stock market. Thanks to a bit of fun in The Independent's business section last week, I've been nosing around some of the members of the "90 per cent club", lovingly detailed in that article and listed by Thomson Reuters. Just in case you hadn't guessed, these are the shares that have lost over nine-10ths of their value from their peak over the past three years. That is, excluding the ones, such as Northern Rock, that have lost 100 per cent.

Surprisingly, perhaps, there aren't that many in the 90 per cent club (the more volatile AIM stocks are excluded). They are: Land of Leather (down 94.4 per cent); Paragon Group, of buy-to-let fame (off 93.2 per cent); Barratt Developments (92.8 per cent to the bad); SCI Entertainment (91.8 per cent); and the comparatively outperforming Skyepharma (down 90.4 per cent).

Some other stocks you might have heard about are not there. Yet. Bradford & Bingley has plummeted from a high point not so long ago of 536p to around 71p now, a mere 86.7 per cent down. Alliance and Leicester, another recent buy of mine, is off 71.9 per cent.

At this point I have to apologise, for the second week running, over my failure yet again to call the bottom for the banking sector. Just when you thought our banks couldn't go lower, they did. The only good news lately for me is that the Royal Bank of Scotland managed to keep its share price above the rights issue price. Others, as we have seen, have not been so lucky.

As it happens, I still think the banks are oversold, and the smart money will be piling into them, even if the bottom is not quite within sight yet, and even if the writedowns and losses will continue for a time.

I wish I could be as optimistic about the house-builders. At first glance, Barratts must be worth a punt. For those of us brought up on those memorable TV adverts for Barratt homes with the wonderful voice of the late Patrick Allen (much missed) it is difficult to imagine a world without Barratt Homes. It is a bit of a British institution, and sometimes, like all British institutions, the butt of a few gags.

However, such is the state of the property market that only the truly brave would put their money into the sector, and especially Barratts. It has problems. Its debts are huge, and it may soon be in danger of breaching its banking covenants. From this vantage point, with the benefit of hindsight, it paid too much for recent acquisitions such as Wilson Bowden. The best that can happen in those circumstances is that the banks will ramp up its interest bill. The credit crunch will see to that. The downward spiral in real estate pushes land prices disproportionately lower; like many primary commodities, land values tends to amplify movements in the economy. If the worst predictions come true, Barratt's land bank will be in negative equity before too long. Housing transactions are at their lowest in 30 years. First-time buyers can't get mortgages. It is not a good time to be selling starter homes, or most other types of property. Is it inconceivable that Barratt might go bust?

Yes and no. Yes in the sense that it could collapse under the weight of its difficulties and the housing slump. No, I think, in that the banks would be very unwilling to let a major house-builder go under. What's more likely to happen is that the banks will effectively take control of it and start running it for their own advantage. That would leave individual shareholders in a very vulnerable situation indeed.

So even at these prices, we may not have seen the end of the bust for the home-builders. Even if the shares have fallen by 95 per cent, it has to be said that there is no God-given law that says they might not fall by 95 per cent of where they are now. Unlike the banks, the house-builders are just too risky. It is difficult to see all of them making it through the storm.

By the way, one of the interesting things about the current credit crisis and downturn is how unprepared the Government seems to be for the industrial and commercial – rather than financial and economic – consequences of it all. What would ministers do if a major house-builder, commercial property firm, chain of estate agents, major airline or tour operator goes bust? Is there a contingency plan? Have they even thought about it?

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