Fund manager Mark Martin has slammed the bonuses being received by housebuilder executives and warns a political storm is brewing for the sector, which is currently a favourite of yield-hungry UK equity income funds.
In April, Persimmon chief executive Jeff Fairburn landed a £112m bonus through a long-term incentive plan involving 4.8m shares.
But Martin, who manages the Neptune UK Mid Cap fund, argues chief executives in the sector are “surfing a wave of government stimulus”.
“Everyone knows about help to buy, everyone knows about QE, everyone knows about ultra low mortgage rates,” Martin explains.
In March, shareholders, including Standard Life Investments, voted against Crest Nicholson’s remuneration policy arguing performance targets were too easy and last year Berkley Group’s annual report revealed its chief executive took home £21.5m.
“What people aren’t talking about enough is the potential for the political tailwinds to become a headwind if the media starts talking about the CEO of Persimmon paying himself an eight-figure bonus as a result of not really him being a great housebuilder, in my opinion, but actually because he’s free-riding on the UK government’s stimulus.”
The UK “desperately needs that money to be ploughed back into building new houses”, Martin says, warning UK equity income funds favour housebuilders for their special dividends, “which is great for ‘Fat Cat’ capitalists, but isn’t great for the UK PLC”.
Poublic anger about rising inequalities could turn to the sector, Martin argues.
“The recent tragic events in Kensington will only add fuel to the argument that there are inequalities and the CEOs of these housebuilders are benefiting inappropriately to my mind.”
Politics aside, Martin argues housebuilders are overvalued as the UK faces a clouded outlook for consumers.
“Late 2008/2009 we nearly triple weighted the housebuilders. Even then I had some concerns around the housing market, but valuations were very low,” Martin says.
Today, the UK has one of the highest price-to-income and price-to-rent ratios in the developed world and price-to-book is nearing highs seen just before the sub-prime crisis in 2007.
Martin says superficially he can understand why UK equity income funds are moving “en masse” to housebuilders in their desperate search for yield, but he argues managers should be considering the wealth of their underlying investors.
“Income funds tend to be held by people who are more risk averse, probably older and therefore, probably, own their own houses and have significant housing equity.
“Personally if I was one of those people, I would not be thanking my income fund manager for doubling up my bet. That is a risky and very fragile thing to do.
“As an income fund manager, if you are putting your unit holders into housebuilders you are making your clients extremely fragile from a financial perspective.”