The word of the month in the real estate world is ‘resilience’. It has been used by Halifax to describe the state of the housing market, and by Taylor Wimpey’s CEO.
Unveiling the homebuilder’s latest results, Jennie Daly said: “I’m pleased we delivered a resilient performance, with first half completions slightly above our expectations.”
Performance at Bellway has also been “resilient,” according to Jason Honeyman, the group’s CEO.
In light of the gloomy housing price projections, these assessments will seem surprising to some – and delusional to others.
But I’d say they’re a signal to take a closer look at homebuilders, against the backdrop of what Alan Dobbie, co-manager of the Rathbone Income fund, calls “our cultural relationship with real estate – and the long-term structural need for real estate.” called good. more homes’.
Bricks and Mortar: Betting now on housing stocks involves looking beyond their declining profit margins, their declining sales and other daunting details of their conditions
Right now, homebuilders face huge obstacles. These difficulties are of an economic and political nature.
Prospective home buyers have been hit by sharply higher housing and borrowing costs. The average mortgage interest rate over five years is 6.06 percent, compared to 3.81 percent a year ago. Rates have risen so much that there is a new word to describe certain young professionals who have “given up owning real estate”: the Guppies.
Both the Government and the Labor Party make a big part of their ambitions to deliver more housing, with housing likely to be a major battleground in the general election.
But the official target of building 300,000 homes a year in England was abolished by the end of 2022 and the Help to Buy scheme was withdrawn in March this year.
Betting on homebuilder stocks now involves looking beyond their declining profit margins, their declining sales, and other daunting details of their current circumstances.
It is a bet on corporate resilience – which should be backed by their cash reserves and their land banks.
The investment trust Artemis Alpha is holding Berkeley Homes, Bellway and Redrow because, as managers John Dodd and Kartik Kumar note, “the UK is facing an accumulated supply shortfall of more than 1 million homes.”
London is estimated to need some 90,000 new homes worth less than £1 million a year. Some 30,000 have been delivered since 2020. This underscores the magnitude of the nationwide opportunity that homebuilders are ready to seize when the time comes.
Richard Donnell, head of research at the Zoopla platform, says: ‘I feel like they’re waiting for the next election and hoping for a bit more leadership on new developments and the need for more housing.’
Meanwhile, these companies are better positioned than before to cope with the slowdown in growth.
Dobbie says: ‘At the start of the global financial crisis in 2007-2008, many homebuilders’ balance sheets were in a difficult state.
“But this time they prepared for a downturn by pulling out of land purchases; their balance sheets are strong.’
Rathbone Income has interests in Taylor Wimpey, Bellway, Redrow and Persimmon and Redrow. Shares of the top four are up since the start of the year, but Persimmon’s price is down 7 percent, reflecting perceptions that the company relies on start-ups.
It would be tempting to assume that you should allocate some money to all homebuilder stocks and sit back and wait for better times to come. But this may not be a soothing experience given the forecast that the industry’s output may not return to 2021 levels until 2026.
Oli Creasey, equity research analyst at Quilter Cheviot, calls for more discernment.
He suggests avoiding Persimmon, as well as Vistry, which has less cash buffer than its peers.
He says, “In our view, Taylor Wimpey is the company best positioned to weather the ongoing storm, with a very comfortable net cash position and one of the lowest overall leverage ratios in the industry – around 4 percent.”
The gearing ratio is a measure of the company’s debt to equity. Creasey also quotes Berkeley. This group is more dependent than the rest on the southeast and London, where price pressure is greatest, Halifax reports. But there should be demand from foreign buyers exploiting the weakness of the pound to acquire prime London real estate.
Berkeley’s dividend yield is 5.93 percent. Taylor Wimpey offers 8 percent. The entire industry is generous to shareholders.
Think of these payouts as a kind of compensation for the volatility of housing stocks, which even the industry’s biggest fans admit can be unnerving.
The ups and downs are accentuated by the relentless stream of real estate news – it is, after all, a national obsession.
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