They say an Englishman’s home is his castle. Perhaps that is why Chancellor Rishi Sunak has been at such pains to protect Britain’s housing market from the negative economic impact of coronavirus.
The UK’s housing stock accounts for around a third of all our wealth, so if it were to fall in value, it could have a catastrophic effect on consumer confidence.
But Rishi’s recent Budget boosts – a continuation of the stamp duty holiday followed by a tapered finish, as well as Government backing for 95 per cent mortgages – seem aimed at ensuring that the housing market continues to rise.
Rishi’s intervention is good news for Britain’s housebuilders, which explains why many analysts and investment managers are now feeling positive about the sector.
Laying good foundations: Investors who are interested in housebuilders are spoilt for choice
‘Sunak’s decision to slash stamp duty payments for many house buyers has elevated house prices,’ says Joshua Mahony, senior market analyst at spread betting company IG.
‘From an investor standpoint, the tapered nature of this stamp duty boost does alleviate fears of a future sharp decline in house prices, while easing Brexit fears provide a fresh reason to be optimistic about future growth prospects.’
David Smith, fund manager at investment trust Henderson High Income Trust, agrees. He says: ‘I am positive about the outlook for the housebuilding sector. There will be support in the short term from the UK economy recovering post-pandemic.
‘There should also be good demand for newbuild homes in the medium term as renters and homeowners reassess their living requirements after lockdown and working from home.’
Investors who are interested in housebuilders are spoilt for choice. The FTSE100 Index contains several big name firms including Barratt Developments, Berkeley Group, Persimmon and Taylor Wimpey. In the FTSE250 Index, there are also Bellway and St Modwen Properties while Harworth is listed on the FTSE All-Share Index.
Shares in all these companies have done well in recent months. While housebuilders originally struggled in the first lockdown last March, they were able to restart building relatively quickly, leading to share price improvements ahead of the rest of the stock market.
For example, Barratt’s shares have jumped 71 per cent over the past year while shares in both Persimmon and Bellway have risen by more than 60 per cent.
Russ Mould is investment director at wealth manager AJ Bell. He says: ‘Record low interest rates, fierce competition between mortgage lenders and ongoing Government initiatives to support the housing market, are all stoking demand for properties where there was already a shortage of supply.’
Crucially for investors, housebuilders have been able to pay dividends, unlike many other sectors, making them attractive to income seekers. Despite their strong recent performance, many experts believe shares in housebuilders have further to go, especially as coronavirus fallout continues to change the way we live and work.
Jason Hollands, a director of wealth manager Tilney, says that the shift to homeworking that will continue once the pandemic has passed ‘has also opened up new possibilities, underpinning interest in housing outside of major cities, including country towns and villages in commuter belts’.
Richard Hunter, head of markets at investment platform Interactive Investor, says that builders are already preparing for this out-of-city demand, acquiring new land to deal with changing needs.
He says: ‘Bellway had a recent land-buying spree of nearly 9,000 plots. The acquired sites were geographically spread, and could therefore benefit from sprawling demand away from conurbations as long commutes diminish following the rise of people working from home.’
While the housebuilding sector as a whole looks bright, experts are divided on the most attractive stocks to put in an investment portfolio.
Henderson’s David Smith likes Persimmon because of its ‘sector-leading returns and high dividend’ and Bellway as a result of its good ‘growth prospects and attractive valuation’. Tilney’s Hollands says Taylor Wimpey is ‘an option for bargain hunters’.
Some of the smaller housebuilders are worth looking at, says Interactive’s Hunter. He adds: ‘St Modwen is already well placed to capitalise on any uptick in demand for more affordable dwellings outside of City centres, as is Harworth.’
Dividend payments from many housebuilders are attractive. Callum Abbot, co-manager of investment trust JPMorgan Claverhouse, points out that Persimmon currently offers investors an annual income of some 8 per cent.
For investors who would prefer to invest in funds rather than directly in shares, there are various ways to get exposure to housebuilders.
Tilney’s Hollands says that a number of actively managed UK equity funds have invested quite heavily in these companies. They include Man GLG Undervalued Assets which has more than 8 per cent of its portfolio in housebuilders and 3.6 per cent in building materials companies. Polar Capital UK Value Opportunities has 7.9 per cent of its assets in housebuilders and 3.5 per cent in building materials.
Darius McDermott, managing director of fund specialist Chelsea Financial Services, likes the TM Home Investor fund managed by Hearthstone Investments. It invests up to 90 per cent of its assets directly in rented flats and houses across the UK, with the rest held in cash and liquid instruments.
The fund’s current focus is on new and modern two and three bedroom houses and flats, and none of the portfolio is in Central London. The fund’s performance has been fairly muted of late, up 11 per cent over five years and just 1.1 per cent over one year.
BUT WILL THEY STAY SAFE AS HOUSES?
Not everything in the housebuilders’ garden is rosy. In the aftermath of the Grenfell Tower cladding scandal, some housebuilders could be required to spend millions of pounds making high-rise buildings safe.
Several companies – including Bellway and Taylor Wimpey – have already made sizeable provisions for legacy cladding issues. And while there is plenty of current demand for houses, this could tail off if unemployment increases sharply.
Interactive Investor’s Richard Hunter warns: ‘While the housing market remains stable, the possibility of rising unemployment and the eventual removal of Government-led support schemes will put additional pressure on the sector in due course.’
Once the stamp duty holiday stampede settles down, it may be easier to see what British people want from their homes – and where they want them to be located – in a post-pandemic world.
It will be those homebuilders who give buyers what they want who will be safe as houses once the pandemic is over.
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