Housebuilder Stocks Rally 20%

Shares in housebuilders Taylor Whimpey, Persimmon, Barratt Developments, Berkeley are all up at least 20% year to date - are there still profits to be made?

Karen Kwok 25 April, 2017 | 3:38PM
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Housebuilder stocks Taylor Whimpey, Persimmon, Barratt Developments, Berkeley are all up at least 20% year to date – despite London house prices posting their largest annual drop in eight years this month.

UK housebuilders are among the best performing stocks in FTSE 100 year to date, as property prices outside of the capital have rallied and confidence in the housing market improves.

Following the EU Referendum result, the Halifax Housing Market Confidence Tracker saw the steepest fall since the tracker began, said Martin Ellis, Halifax housing economist. However, this month the survey showed a small improvement to +44, suggesting that consumer confidence in the housing market is finding a new normal.

Property website Rightmove shows that London house prices posted their largest annual drop in eight years in April, falling 1.5% to £636,777 from a year earlier. But the Halifax House Price Index, reveals house prices in the West Midlands have increased at the fastest pace of all UK regions – up 11%. House prices across the South East rose 5%, while property prices in the East Midlands picked up by 8.0% year-on-year. Nationwide the first three months of this year say the slowest annual rise in prices since 2013 at 3.6%.

Housebuilders Stocks are in a Sweet Spot

“We are really in a sweet spot at the moment: low house price inflation, small cost-build inflation, fantastic land availability, all of them enable housebuilders to keep their margins and their profitability,” said Jack Barrat, co-manager of the Silver Rated Man GLG Undervalued Assets fund.

“Investors should not be worried about the slowdown of UK house price growth because housebuilders are not building house price to inflation forecast into their return hurdles.

“If you are telling me the house price is going to fall sharply, yes, it is bad, but if you are telling me that the price of the housing market is stable, then it’s actually a fantastic environment for these guys continuing making money. “

Housebuilder stocks saw big falls following the post-Brexit vote. But they have recovered most of their losses this year. Among 15 housebuilder stocks, Taylor Whimpey (TW.) has gained 33% year to date. This is followed by Persimmon (PSN) and Barratt Developments (BDEV), which saw their share prices up 30% and 27% year to date.

Commercial property stock Berkeley Group Holdings (BKG) also saw a 20.7% rise in value this year. Housebuilders Redrow (RDW) and Bellway (BWY) rose 31% and 14% in value year to date.

“I think the vast majority of the housebuilder stocks’ recovery year to date, is just catching up the big fall they had following the post-Brexit vote. The outperformance has been very understandable and the momentum is going to continue. Housebuilder stocks still look like in good value,” said Barrat.

James Illsley, portfolio manager of JP Morgan UK Equity Core agreed, saying that housebuilder stocks are still trading at reasonable valuation with fantastic earnings momentum behind them.

“Fundamentally the housing market in the UK continues to be undersupply. That’s a structural backdrop. The ongoing Government’s support for help-to-buy really help buyers in terms of financing and deposit as well, supporting the net demand for housing in the UK,” said Illsley.

Be Selective When Investing in Housebuilders

While valuation of housebuilders still look cheap, investors need to be very selective when investing in them, Barrat said.

“It’s not good enough to just buy the sector any more, as you have to be smart with the stocks you buy. We think we can do better than simply buy a housebuilder stock index or buying large housebuilders. We are parking our money with companies that we see growth rather than maintaining profitability in the sweet spot. There is one that we have been looking into: Countryside Properties (CSP),” said Barrat.

Countryside Properties (CSP) is up 8.8% year to date. Barrat believes Countryside is a good investment as this company is much more exposed to areas where government highlighted with high growth potential in the housing industry. This suggests that Countryside has a very strong growth potential.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Barratt Developments PLC674.40 GBP0.00
Bellway PLC2,983.00 GBP0.00
Berkeley Group Holdings (The) PLC4,370.00 GBP0.00
Countryside Properties PLC311.20 GBP0.00
JPM UK Equity Core E Net Acc4.24 GBP-1.02Rating
Man GLG Undervalued Assets Profl Acc C172.02 GBP-0.97Rating
Persimmon PLC2,549.00 GBP0.00
Redrow PLC637.00 GBP0.00
Taylor Wimpey PLC156.65 GBP0.00

About Author

Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk