Market Report: Strong house prices lift HBOS to record high

HBOS shareholders started their new year celebrations early after the country's biggest mortgage lender ended 2005 at a record high. The shares, which edged 1p better to 993p yesterday, have soared by more than 17 per cent this year after doomsayers who forecast a collapse of the housing market were proved wrong.

House price growth may have slowed, but Britons are still borrowing heavily to buy homes that look set to become more affordable next year. HBOS' performance over the past year is particularly impressive when contrasted to that of its sector peers.

They typically rose by just 8.7 per cent but some lagged far behind. Rooted to the floor of the sector was Royal Bank of Scotland, which crept just 0.2 per cent higher over the year. Lloyds TSB fared slightly better, gaining 3.3 per cent, while Barclays gained 4.3 per cent.

Meanwhile, investors opted to lock in profits from the market before the new year. As a result, the FTSE 100 index closed 19 points lower at 5,618.8 during a half day of trading - the last session of 2005, which concluded at 12.30pm. It was a similar story lower down the pecking order of indices. The FTSE 250 lost 27 points to 8,794 while the FTSE All Share fell 9 to 2,847.

Few were surprised to see BAE Systems fall 6.25p to 381.75p, J Sainsbury retreat 5p to 315.25p, Morrison Supermarkets give up 2.25p to 193.5p and Marks & Spencer drop 5p to 505p. Those four stocks have been among the best performers in the blue chip index over the past few months.

Hilton, off 5.25p to 315.25p, was also hit by profit taking. In the case of the leisure group, one really can't blame investors for taking some money off the table. Its shares have soared by 35 per cent since May as the market awaited the sale of its hotels division. The deal was finally announced on Thursday and Merrill Lynch estimates that Hilton is now in a position to return up to £4bn, or 230p a share, to its stockholders. The US broker sees little downside in the group, which will soon be renamed Ladbrokes. "While bid speculation persists we see little downside in the current share price," Merrill told its clients yesterday.

On the subject of takeover speculation, there was much discussion among the few traders at their desks yesterday of which companies are most likely to lose their independence in 2006. Hilton is high on most traders' lists. Indeed, consolidation in the leisure sector could well prove to be a major theme next year. Rank, off 3.25p to 305.75p, is also tipped for takeover as is London Clubs, steady at 139.5p. Like Hilton, Rank sold off a key business earlier this week, making it an increasingly desirable prospect for a private equity predator.

Elsewhere, ITV, up 1p to 112.5p, Homestyle, 0.5p higher to 112p, and Pilkington, 2.5p stronger at 149p, were all in demand on bid hopes. Pilkington is presently in talks with Nippon Sheet Glass, its largest shareholder, about a takeover, although nothing conclusive has yet emerged from the negotiations with the Japanese. As for Homestyle, it is controlled by furniture group Steinhoff in all but name and many in the City expect the South African firm to take the retailer private early in the new year.

In the world of smaller companies, the broadband internet provider PlusNet added 4.5p to 281.5p on hopes that it too will be swallowed by a bigger player. Rival Easynet was bought by the satellite TV giant BskyB back in October. The £211m deal highlighted the value of broadband providers to media companies, which are increasingly looking to distribute their content across the internet.

Havelock Europa added 1.5p to 145p on talk of strong trading at the shop interiors specialist.

Surfcontrol rose 14p to 524.5p after Greg Lock, chairman of the software group, bought 10,000 shares at 512p. Stanley Gibbons ticked 3.5p higher to 90.5p after the stamp dealer assured the market that its annual results will meet forecasts. The company said demand for rare stamps continues to be strong.

New Star Asset Management lost 0.25p to 292.75p despite news that its retail funds under management had passed the £7bn mark in late December, which leaves them up by about a quarter from a year ago. New Star has been one of the fastest-growing UK fund managers since it was set up in 2000.

Finally, ReEnergy Group, which specialises in waste management, sustainable energy and water treatment, made its debut on AIM. Having raised £6.5m via Cenkos Securities at 75p the stock closed at 76.5p, valuing the company at just under £30m. ReEnergy boasts a portfolio of technology which will help companies and local authorities meet European Union landfill directives and carbon emissions targets.