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Is it time to ditch property just five months after one of the biggest boosts to the sector in decades? By Nick Reeve | Published Sep 02, 2013 The introduction of the government’s Help to Buy scheme in April triggered huge gains for housebuilders and other property-related stocks, which in turn has helped UK small and mid-cap managers – who have the widest selection of such stocks – to record strong 2013 performances. The average performance of the 10 biggest mid-cap focused funds so far this year has easily outstripped the wider IMA UK All Companies sector, according to FE Analytics – 23.4 per cent from mid-cap portfolios compared with 16.6 per cent from the sector. A big part of this outperformance has been exposure to the housing sector, whether through housebuilders or other companies indirectly linked to this area. Star mid-cap managers such as Franklin Templeton’s Paul Spencer and Old Mutual’s Richard Watts have been particularly vocal in their support for the housing sector. It’s easy to see why. Investment Adviser’s research into the top holdings of 10 UK mid-cap funds found that between them they invest in 22 property-related firms. Of these firms, 20 have posted share-price gains of more than 25 per cent in 2013 alone. Examples held by several managers, including both Mr Watts and Mr Spencer, include Ashtead Group, a provider of heavy-duty construction equipment, which has gained 42 per cent so far this year; and kitchen-maker Howden Joinery, which is up 51 per cent. But there are increasing signs that the property recovery may have run its course already, and it may be time for the likes of Mr Spencer and Mr Watts to cash in on their profits. Last month property fund managers from Aberdeen and Henderson told Investment Adviser that the easy money may already have been made from property, with Aberdeen’s Sanjeet Mangat warning investors in her £176.2m Property Share fund not to expect its strong performance track record to be repeated. Ms Mangat’s fund is a member of the Investment Adviser 100 Club of outperforming funds and providers (see page 29). John McClure, manager of the top-performing Unicorn UK Income fund, said in June that he was steering clear of most housebuilders and developers as they were “structurally flawed” and did not have any substance. Miton’s Martin Gray, manager of the £883m CF Miton Special Situations fund, believes the “run has happened” and, while acknowledging some upside may remain, says he “wouldn’t buy in now”. City Financial’s David Crawford – who runs the firm’s top-performing long/short UK Equity fund – points out that strong performance based almost exclusively on government stimulus is bound to be short-lived. Investors only need look at the reaction of the equity and bond markets to the potential slowing of another form of stimulus, quantitative easing, to see that such catalysts cannot last forever. The UK government is desperate to prove it can help more people onto the housing ladder, and with Help to Buy it is helping first-time buyers to secure mortgages with deposits of as little as 5 per cent. Many of the same companies held by UK managers have specific ‘Help to Buy’ pages on their websites, detailing what aid there is available for first-time buyers – and giving a strong hint that this scheme has directly benefited them. “In a properly free market the value of houses would drop,” Mr Crawford says, adding that banks are still not lending prudently to borrowers trying to get on the housing ladder. He highlights banks that are granting mortgages equivalent to eight or nine times an individual’s salary, as opposed to two or three times. Martin Gray adds that the Help to Buy scheme “sounds to me like electioneering, which is a little worrying”. But for those still surfing the wave of housing-related stocks, the end is not yet in sight. Patrick Newens, small-cap fund manager at F&C, argues that the “electioneering” by the government through Help to Buy is likely to mean the scheme will last until at least the next election in 2015. He adds that house price-inflation has only just started feeding into companies’ figures and analysts’ forecasts. “Housebuilders are all seeing earnings upgrades and their margins are going up,” he says, leaving room for “decent upgrades” still to come. In addition, Aviva Investors’ Toby Belsom says it is not all about property prices and first-time buyers. He points to St Modwen Properties, LSL Property Services and Paragon Group – all top holdings in his UK Smaller Companies fund – as examples of property-focused companies that are not dependent on house prices. Instead the companies operate in longer-term projects, renting, and the secondary market. For these reasons Mr Belsom says he is “comfortable” with the stocks’ valuations, in spite of some very strong numbers so far this year. Opinion is split between those that did back housebuilders and have benefited from the move, and those who by their own admission have not, including Mr Gray and Mr Crawford. The debate is likely to continue for as long as the stocks themselves keep pushing higher, but with specialist property managers already having to hunt ever harder for attractive valuations, investors should be at least wary of increasing their exposure. Continue reading →