UK Homebuilders with Christian Olesen from Olesen Value Fund
Summary
Bellway’s 0.89x tangible-book valuation prices in a prolonged trough despite a history of compounding per-share value. Christian Olesen contrasts today’s multiple with roughly 1.25-1.3x historically and his estimate of “at least one and a half times tangible book” for intrinsic value. With completions still about 35% below pre-rate-shock levels and book value growing even now, recovery offers both earnings normalization and rerating.
The bear case hinges on UK housing resembling 1980s Detroit, but Olesen sees weak cyclicality rather than structural collapse. Andrew Walker points to Brexit, fiscal strain, departing wealth, and near-zero growth; Olesen counters that he does not view the UK as a disaster and expects it to keep growing, albeit slowly. He sees long-run housing demand underpinned by population growth and argues that mortgage rates jumping from roughly 1.5% four years ago to about 4.25% created sticker shock, yet “housing is a basic need with no substitutes,” making long-run demand relatively price-inelastic in his view.
Bellway’s limited London exposure materially lowers the risk that its book value proves illusory. London remains extremely expensive and exposed to a possible—not forecast—price decline, while affordability outside London looks reasonable against median incomes and ownership costs. Only about 2-4% of Bellway’s completions are in London, important because builder inventory is roughly two-thirds land and one-third work in process, making a 20% selling-price decline potentially write-down-heavy.
The industry’s post-GFC discipline makes the current land bank safer than the headline cyclicality suggests. UK residential-development land fell roughly 50% in the financial crisis; nominal prices have only returned to around the 2007 peak and remain at least 40% lower after inflation. Consolidation, fewer bidders, similar valuation models, and common hurdle rates have curtailed bidding wars, while Bellway’s fiscal-2009 ROE of minus 4% was reportedly the industry’s second best.
Persimmon shows that UK builders are not interchangeable, even when their stocks all look statistically cheap. Its cheaper homes, less-contested locations, and smaller plots hold land costs near 11-12% of revenue versus roughly 20% at Bellway, supporting historically excellent margins and returns on capital. Olesen thinks its approximately 1.25x tangible-book multiple—the sector’s highest—is “deserved,” while Bellway’s edge is its conservative culture and cheaper entry price.
Capital allocation is improving enough to challenge the “sleepy UK governance” discount. Olesen concedes that management ownership and equity incentives are weaker than a US investor would prefer, but Bellway has introduced buybacks, greater asset-turnover discipline, and a plan to raise leverage including land payables from roughly 5% to 15-20% of total capital. Walker recalls the latest repurchase as £150 million, or about 5% of market value: “It’s not huge, but it’s also not nothing.”
Planning reform, possible demand stimulus, and deeply negative domestic sentiment provide catalysts without being required for survival. Easier permissions should accelerate land-bank turnover and volumes, although Walker’s “be careful what you wish for” challenge remains: scarcity also supports asset values. Olesen ultimately sees 0.89x book becoming perhaps 1.5x over the next few years, plus book-value growth, while calling Bellway a “sleep well at night investment” for a patient holder.
Deep dive
1. Bellway’s discount reflects a cyclical demand shock, not a broken franchise
Olesen’s setup is deliberately simple: housing demand moves quickly, supply adjusts slowly, and the 2022 interest-rate shock caused UK new-build demand to fall very significantly. Bellway’s completions are roughly 35% below their pre-increase level, unlike the comparatively resilient US market, leaving the sector at historically depressed multiples.
Bellway trades at 89% of tangible book versus a historical range around 1.25-1.3x. Olesen thinks even that history understates value: “The intrinsic value is at least one and a half times tangible book,” a level the shares have exceeded before.
The second leg of the return is compounding while investors wait. Bellway remains profitable, and Olesen says value is compounding while investors wait, with book value increasing despite depressed demand. Walker frames the historical return profile as ROEs in the low teens, probably closer to the mid-teens through the cycle; a rerating would therefore apply to a larger future equity base.
Sentiment supplies the inefficiency. Walker says UK investor-relations teams report almost no domestic interest while international value investors do the outreach; Olesen reads this as evidence of how thoroughly both UK equities and homebuilders have fallen out of favor.
2. The Detroit analogy stress-tests whether tangible book is genuinely tangible
Walker’s central challenge is macroeconomic: if Brexit, fiscal weakness, lost financial activity, and wealthy residents leaving produce prolonged decline, buying land-heavy Bellway below book may offer false comfort. Detroit homeowners learned that leverage against structurally impaired geography can destroy nominally solid asset value.
Olesen’s rebuttal is measured rather than euphoric. Britain is near recession, growth is roughly zero, and consumer confidence is very weak, but he does not view the UK as a disaster and expects the economy to keep expanding, “albeit perhaps slowly.”
The immediate problem is affordability shock: a buyer who could obtain a mortgage near 1.5% four years ago may now face about 4.25%, after even higher interim rates. Olesen nevertheless argues demand “almost has to rebound” because housing is essential, lacks substitutes, and has repeatedly shown cyclical—not permanently disappearing—demand over decades.
3. Geography and land discipline contain the asset-side tail risk
Olesen separates London from the rest of Britain. London prices surged from the financial crisis through Brexit in 2016 and then stayed high; he is not forecasting a fall, but considers one a material risk. Outside London, price-to-income and ownership-cost measures look much more reasonable historically.
That distinction matters because only about 2-4% of Bellway’s current completions are in London. A builder resembles a manufacturer carrying unusually long-lived inventory—roughly two-thirds land and one-third work in process—so land bought against an obsolete selling-price assumption can create “massive write-downs” if home prices fall 20%.
The pre-GFC land market offers the cautionary example. Residential-development land prices dropped about 50%; nominally they have recovered only to around, or slightly below, the 2007 peak, leaving them at least 40% below that peak after inflation.
Olesen sees a more rational industry today: consolidation means fewer bidders, fewer people want to become builders, and public companies use similar land-valuation models and hurdle rates. The bidding wars of the mid-2000s have largely disappeared, reducing—but not eliminating—the risk that current book value embeds reckless land purchases.
4. Bellway wins on resilience while Persimmon wins on land economics
Bellway is “a pretty boring home builder,” geographically diversified and focused on cookie-cutter, middle-of-the-road single-family homes, with a slight northern weighting rooted in its post-World War II origins. Its distinguishing feature is not novelty but decades of conservative execution.
The clearest evidence is fiscal 2009: Bellway produced minus 4% ROE in the year ending that July, reportedly the second-best result among UK peers. Most builders performed badly during the GFC; Bellway’s unusually contained loss and conservative culture make its management history part of the qualitative thesis.
Persimmon follows a different route, building materially cheaper homes on smaller plots in less desirable—and therefore less competitive—areas. Land consumes only about 11-12% of revenue versus nearly 20% for a conventional builder like Bellway, supporting historically excellent margins and returns on capital, as well as its roughly 1.25x tangible-book valuation.
5. Capital allocation is becoming a catalyst without sacrificing survivability
Walker’s pushback—worth keeping—is that UK governance often looks “sleepier” than in America: modest insider ownership, less demanding incentive plans, limited focus on total shareholder return, and reluctance to use leverage or repurchases. A company man promoted after 25 years may know construction better than capital allocation.
Olesen concedes that Bellway’s incentives are not as aligned as he would like, though management does own equity and receive equity awards. He treats the gap primarily as a UK cultural convention, not proof of hostility to shareholders, and argues the company’s actual long-term record matters more.
More importantly, behavior is changing. Bellway has announced another buyback, which Walker recalls as £150 million, or about 5% of market capitalization, and a new framework emphasizing repurchases, asset turnover, and more efficient use of the balance sheet. Olesen says the new CFO might have contributed but does not claim certainty.
Including land payables, net debt is roughly 5% of total capital and management intends to move toward 15-20%. Olesen believes that remains survivable even in a severe downturn: builders release cash when they stop buying land and reduce work in process, helping avoid bankruptcy or a deeply dilutive equity raise.
6. Policy and broader UK cheapness add optionality to the core rerating
Outside homebuilders, Olesen finds UK value mainly in small caps and idiosyncratic names. One example is James Latham, an illiquid wood-panel distributor serving more repair, maintenance, and improvement demand than new construction; he describes it as unusually safe and high-quality at around 10 times earnings.
Walker notes similarly cheap housing-adjacent names such as Travis Perkins and Wickes amid weak consumer confidence. His attraction to UK disclosures is tangible: daily Form 4 filings let shareholders repeatedly see “another day, another buyback.”
The Labour government, despite being viewed as business-unfriendly, has improved the planning-permission process. Walker asks whether easier building is bearish because restricted supply supports prices; Olesen calls it net positive because faster land turnover and higher volumes should lift intrinsic value, though he concedes demand must cooperate and scarcity currently underpins assets.
A new-build demand-stimulus program is another possible catalyst: Britain has not had one for a couple of years, and Olesen cites speculation that a program might appear within the next year or two. It is upside optionality, not the core thesis: Olesen expects demand to normalize or receive stimulus, book value to grow, and Bellway to move from 0.89x toward perhaps 1.5x book over several years.