A few home truths

With the housing market on the rise, Michael Goodman combs the property sector for the best bets in shares

Suddenly, housing is back in fashion. Pundits are gazumping each other with forecasts of a recovery in prices and activity. At least 1.3 million homes will change hands this year, and if the number of sufferers from so called "negative equity" continues to plummet even more homeowners will move in 1997.

Estate agents are early beneficiaries of this improvement. Any rise in the number of moves coupled with even modest price rises rapidly feeds into their commission income. In technical jargon, the business is "highly geared".

It's not before time. The business has been decimated since the Eighties boom. The main corporate players who rushed in to gain high street outlets for mortgages and insurance have either retired hurt or suffered heavy losses. The top eight surviving corporates, most of which are owned by banks or insurance companies, reported 1995 losses totalling pounds 77m, against pounds 42m in 1994. Poor sales after a promising spring, plus a fee-cutting war, made 1995 a difficult year. Hambro Countrywide, the only one of the top eight to be publicly quoted in its own right, saw its share price slither to the 30p range last winter. Since the spring it has bounced back spectacularly to a high of 95p after turning in good half-year results.

It made pounds 10.5m against a pounds 5.8m loss in the first half of 1995, and a pounds 3.9m loss for the full year, when the group's estate agency business made a pounds 22m loss, was partly offset by profits from life insurance and financial services.

Much of the estate agency loss was due to a one-off factor, the loss- making former Nationwide estate agents, unloaded by the building society in autumn 1994. Nationwide suffered a bad case of negative equity, as it let them go for a mere pound. The deal was not quite what it seemed however as Nationwide also received a 3.4 per cent stake in Hambro Countrywide and a further pounds 7m for the profitable surveying side of the business.

The combined businesses are now the largest high street estate agency chain in the country. More than 700 outlets trade under separate local names such as Mann and Co, Bairstow Eves, Dixons and Spencers, as that seems to be what homebuyers prefer.

When Hambro Countrywide was first floated in the mid-1980s estate agency was all the rage and it made profits from this business alone. The board was shrewd enough to pay for acquisitions with shares rather than cash and to set up its own life insurance business as the housing bubble burst.

Hambros Bank holds 52 per cent of Hambro Countrywide equity and had earlier backed the legendary Sir Mark Weinberg to build up Abbey Life and Hambro Life in the Seventies. The other big shareholder is insurance group Guardian which holds about 20 per cent.

Life assurance profits helped offset the mounting estate agency losses during the past five years and they will be more in evidence in the future. In September 1995, Hambro Assured Life, as the life office is now called, bought out Premium Life. Reorganisation of the former Premium Life threw up a one-off pounds 2.5m addition to the 1995 profit and loss account while life business profits rose fivefold to pounds 16.5m. In terms of policies in force, the group's life business is probably worth over pounds 100m, roughly a third of the group's capitalisation.

Before the housing market took off this summer, analysts at UBS had already predicted Hambro Countrywide would return to profit this year thanks to increased life assurance profit and an estate agency loss trimmed to pounds 10.5m. Even bigger insurance profits and further pounds 7m cut in the estate agency loss should mean double-figure group profits for 1997.

Improved results from Hambro Countrywide will help profits of its parent Hambros Bank recover, predicted UBS. From a low point of pounds 14m this year, Hambros Bank should make pounds 50m pre-tax in 1997.

Two other stocks in the property sector, Savills and John D Wood, have already benefited from the improvement in the housing market. Unlike Hambro Countrywide both specialise in the middle to upper sector of the market, where prices began to recover two years ago. Both returned to profits 18 months ago and their full-year figures published in July showed the improvement accelerating.

For Savills, the full year was 18 per cent ahead at pounds 4.1m while John D Wood was 45 per cent ahead at pounds 729,000. Shares in both companies have doubled in the last 12 months, John D Wood to 75p and Savills to 87p. John D Wood is currently capitalised at pounds 6m and Savills at about pounds 33m, compared with pounds 335m for Hambro Countrywide. Shares in John D Wood should be more marketable in future as the company is seeking a full listing. Both merit consideration for their above average dividend yield and continued progress in their core markets.

In spite of the strong recovery this year none of the trio's share prices are anywhere near the late-Eighties levels before the bubble burst. In 1988 Hambro Countrywide topped 150p while the other two peaked above 100p. All three have shown surges in the past only to fall away as the housing market failed to meet forecasts.

If this time the improvement is "for real" then these shares are still worth buying.