City Talk: Hopes fade for housebuilders

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The Independent Online
While the fizz in residential property continues to ripple out from the South-east into other regions, the first signals of how Labour's policies can be expected to affect the market are becoming clearer.

Labour no more want a boom-and-bust housing market, than they want a boom-and-bust economy. So the mini-boom in the South-east is about as welcome as another winter of discontent.

A quarter of a point was new Chancellor Gordon Brown's first and last move on interest rates, before bequeathing independence to the Bank of England to set interest rate policy.

The next most likely move will be a reduction in mortgage interest relief at source.

With the Bank set to raise interest rates again - another whole percentage point over the course of the next year is a common outlook - the omens for the housing market are not quite as rosy as they were only a month or two ago.

In stock market terms, it's bad news for the housebuilders. In March, new housing orders fell to a 1 per cent year-on-year increase; public spending in infrastructure has also tailed off.

Look back just a couple of years: when mortgage interest rates increased by just under 1 per cent between October 1994 and February 1995, monthly housing starts fell by 12 per cent, and continued to fall for another nine months. Overall housing starts fell by 2.5 per cent over 1995.

The warnings seem clear: hopes for an upturn in fortunes of the quoted housebuilders look likely to be dashed once again. A significant improvement over the next year in the ratings of such companies as Spring Ram, Redland, Marley and Ibstock is also uncertain.

Another bout of speculation has encircled BAT Industries about whether the group will demerge, and if so, how.

There was some comment that an official linked to the company had hinted a demerger was more than likely. This may be no more than a repeat of the words of chairman Lord Cairns from the AGM, who said that shareholders' interests will decide the future look of the group.

Suppose the two parts - tobacco and financial services - go their own way. What could happen? Talk in the market on Friday was that Abbey National was lining up a bid for the Allied Dunbar to Eagle Star business. This stretches even the financial credibility of Abbey National further than is feasible, with a likely price tag of pounds 10bn and counting.

A theory gaining ground in some quarters is that the financial services arm will instead opt for a mega bid of its own: Commercial Union has been mentioned in this respect. BAT could muster the necessary pounds 6bn, and it is a deal that would probably go down well in the City.

Another intriguing detail came to light on Friday when Gallaher, the UK tobacco arm of American Brands being floated off by its parent, unveiled its listing details. These show that BAT has a standstill agreement with Gallaher whereby it has agreed it will not bid for it until 1999, after it entered into preliminary merger talks last year.

This can only enhance the value of Gallaher, as it is just over a year before BAT can renew its courtship.

For BAT, acquiring a substantial tobacco presence in the UK makes perfect sense. Whether the tobacco business ends up as an independent quoted company remains to be seen. There must be doubts as to whether UK investors will willingly opt for BAT as a stand-alone business, given its exposure to the litigation-riddled US tobacco market.

But for now, it remains a tantalising mesh of conjecture and hypothesis. Even so, the excitement can only support the shares in the months ahead.

Directors share sales threw up a convincing vote of confidence by the chiefs at Allied Leisure, which is concentrating on building up its ten- pin bowling alleys, along with further expansion into themed restaurants. Directors bought a total of 60,000 shares at 31p each, with chief executive Neil Goulden buying 20,000, to take his stake to 206,666.

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