Can you build back better by investing in Britain’s housebuilders?

You may expect Britain’s housebuilders and construction firms to be a sure-fire win for investors this year. After all, house prices are soaring – this month it was revealed they were up 7.6 per cent on a year ago – and there is plenty of pent-up demand for housing.

And yet the sector is underperforming. The FTSE 100 index of the UK’s biggest companies is up 12 per cent over 12 months, but housebuilders Taylor Wimpey, Barratt Developments, Bellway, Persimmon and Berkeley Group are all worth less than they were a year ago. 

So why are they underperforming – and does it mean it’s a good time for investors to get stuck in? 

Time to invest?: House prices are soaring and there is plenty of pent-up demand for housing

Why the sector could be good for income seekers 

Richard Hunter, head of markets at wealth platform Interactive Investor, is one expert who believes the sector’s underperformance is ‘surprising’ –­ a sign it may not last. ‘There is good mortgage availability, house prices are rising and interest rates are very low,’ he says. ‘These conditions should offer housebuilders a solid and supportive backdrop.’ 

Some experts had feared that the pandemic would cause chaos in the housing market. However, the reverse has happened as the economy has remained robust and the pandemic has created new trends that have supported house prices.

David Smith, manager of investment trust Henderson High Income, which invests in Bellway and Persimmon, is positive on the outcome for builders. He says: ‘Demand for new homes has stayed robust given low interest rates, fairly low unemployment, wage inflation and the trend to upscale to larger homes in the wake of lockdowns and working from home.’ 

Darius McDermott, managing director at wealth platform Chelsea Financial Services, agrees that the sector is looking cheap from an investment perspective. ‘The sector is generating huge amounts of cash, thanks to high house prices and large profit margins,’ he says. ‘In conditions such as these, such companies can become cash machines.’ 

The major housebuilders are expected to return this year to the record £5.1billion profit mark achieved before the pandemic – and to then exceed it in 2023. 

As most of this cash is likely to be returned to shareholders through dividends and share buybacks, they could be a good option for income-seeking investors. 

Where the cracks are showing in the sector 

But it’s not all been plain sailing for the housebuilders. 

Households are feeling the pinch as inflation leaps to a 30-year high of 5.4 per cent. This could affect their ability to buy new homes and curb the amount lenders will give them. The Bank of England is under renewed pressure to raise interest rates to rein in inflation, which could also reduce the amount that homeowners can afford to borrow. 

Housebuilders are also facing a large bill to remedy dangerous cladding on blocks of flats, following the Grenfell Tower tragedy. Michael Gove, Secretary of State for Levelling Up, Housing and Communities, has demanded builders pay £4billion towards the cost of fixing dangerous blocks where cladding has left homeowners unable to sell their properties. This will affect housebuilders’ profits. 

But Thomas Moore, manager of investment trust Aberdeen Standard Equity Income, believes that industry action to resolve this issue could prove a winner for housebuilders.

‘A resolution to the cladding issue would help lift the sector in the eyes of investors, especially if it reduced the risk of punitive sector-wide taxes,’ he says.

So which firms will help build your portfolio? 

Picking individual stocks is one way to invest in housebuilders. However, each has its own strengths and weaknesses. These need to be considered before choosing which one to go for. 

Hunter believes Taylor Wimpey is in ‘increasingly good shape.’ Its recent trading statement highlighted the success of its strategy of going on a spending spree during the pandemic to buy up plots of land to build on in the coming years. ‘The bold strategy is already beginning to bear fruit,’ says Hunter. Taylor Wimpey shares are at £1.57 this week, down 1 per cent on last year. 

Hunter also likes Persimmon, which he says has addressed some of the issues over the quality of its new builds and customer satisfaction it was facing pre-pandemic. With an annual dividend yield of nearly 10 per cent, the shares could be a win for income seekers. 

Russ Mould, investment research director at wealth platform AJ Bell, tips relative unknown Springfield Properties, which he believes is a possible takeover target after private equity swooped in and took over rival Scottish builder Miller Homes recently. ‘It specialises in Scotland, where house prices are lower than in England and could catch up a bit,’ he says. ‘It also has a good land bank [that it can develop on] and has dealt well with supply chain issues.’ 

The shares are at £1.56, up 17 per cent on this time last year. 

Aberdeen’s Moore rates Galliford Try, recently buying more shares for his fund. The firm offers something a little different as it sold off its housebuilding business to focus on non-residential construction. 

‘We see growing evidence that Galliford Try has turned the corner in its finances,’ he says. ‘There is growing evidence of its success in generating cash and growing earnings.’ 

Moore believes that the company looks cheap, especially given the amount of cash sitting on its balance sheet. Galliford Try has also committed to achieving net zero carbon across its operations by 2030. Its shares are up 34 per cent in the past 12 months at £1.76.

Try funds that focus on housebuilding stocks 

Investors can also gain exposure to housebuilders through funds and investment trusts. This avoids the need to choose which to invest in and means you don’t have all your eggs in one basket. 

Jason Hollands, managing director at wealth platform BestInvest, says that many of the so-called value funds, which target out-of-favour businesses, are currently snapping up housebuilders. 

Man GLG Income has 12 per cent of its holdings in UK housebuilders. Among its top ten holdings are Bellway, Taylor Wimpey and Barratt Developments.

‘The latest fund update said that exposure to housebuilders had been a positive contributor [to the fund’s performance] during December,’ says McDermott. The fund has generated returns of 19.5 per cent over the past three years. 

Hollands likes Artemis UK Select, which buys undervalued growth companies, and has a 5.5 per cent holding in housebuilders. He is also a fan of Liontrust UK Ethical which has a 5.3 per cent holding. He says: ‘To put it in context, housebuilders represent about 3.5 per cent of the FTSE All-Share Index, so these are relatively bold positions.’ 

However you choose to invest in housebuilders, you need to be able to withstand a bumpy ride. Until the cladding scandal is fully resolved and inflation falls to more manageable levels, share prices could be volatile. 

Long term though, we all need somewhere to live, and these companies are sitting on huge cash piles. So even if they aren’t quite as safe as houses from an investment perspective, they’re a solid bet.