Want to invest in property? 5 reasons to be bullish on UK housebuilders

21st November 2014

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You may not have the cash to become a property tycoon but you can still benefit from the UK housing market through investing in housebuilders.

Office of National Statistics figures have highlighted the plight one in four of those aged 20 to 34 who are stuck at home so it is no surprise that more people now think rising house prices are a bad thing.

To try and tackle this, policymakers have introduced Help to Buy and overhauled planning to strong arm councils into building more homes.

Neil Hermon, manager of the Henderson Smaller Companies investment trust, said these initiatives coupled with low interest rates did much to help housebuilders in 2013 but capital returns this year have been flat and house price rises are slowing.

‘It has led some to consumer whether the market has become speculatively over-inflated and due for a much-needed correction,’ said Hermon.

He added that the drop in weakness is based on a drop in mortgage lending, stagnant wage growth and a lack of global confidence that has weakened demand.

‘In addition the political parties have been scrambling to write ever-more progressive policies to tackle the so-called ‘housing crisis’, acutely aware that winning in this area will earn electoral favour at the polls next May,’ said Hermon. ‘While these concerns are fair, my belief is that the sector as paused and that in reality it is structurally poised to deliver attractive returns for many more years to come.’

Hermon’s confidence in housebuilders is based on five key reasons:

  1. There is cross-party support for policy that will tackle the housing crisis, and allow more homes to be built. ‘All [parties] are acutely aware of the housing crisis, so electoral change is unlikely to deliver dramatic swings in policy positioning,’ he said.
  2. Mortgage lending has decreased year-on-year but for first-time buyers it is still healthy. ‘This is helped by the growing availability of higher loan-to-value mortgages…and where significant pent-up demand exists from restrictions in this end of the market during the years following the financial crisis,’ said Hermon.
  3. There has been a squeeze on the smaller developers post-financial crisis. ‘Lack of bank financing for land purchases is the reason here, driving some to peer-to-peer lending but the majority out of the market entirely,’ said Hermon. ‘It translates to less competition for land, lowering prices for the larger builders and increasing their margins. For these reason they are generating a lot of cash.’
  4. Under-supply is widely accepted to be the cause of inflating house prices, specifically under-supply of affordable homes. However just one in seven councils has stated to build new homes under reformed planning rules meaning ‘structural under-supply is likely to continue’.
  5. The economy may still be muted but job growth is strong and households have less debt. ‘Furthermore, with food and oil prices low, dampening inflation, expectations for interest rate rises have been pushed out: the first being expected in quarter one or two next year, but also making likely the on-going increases gradual,’ said Hermon.

 

Hermon has been looking at larger housebuilders and is investing in Bellway and Taylor Wimpey.

 

‘With strong management teams and economies of scale, valuations remain attractive on a number of metrics and they are handing back cash to shareholders where they can,’ he said of the company. ‘Dividend yields are high and strong dividend growth appears set to continue.’

 

 

 

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