House prices have increased by nearly 11 per cent in the past year – fuelled primarily by the stamp duty holiday, ultra-low borrowing costs, and savings built up by households during the pandemic.
Although most homeowners have properties worth more than ever, investors have also participated in this housing boom.
For example, over the past year, shares in Barratt Developments and Persimmon – both constituents of the FTSE100 Index – have risen by 52 and 35 per cent respectively.
Through the roof: Over the past year, shares in Barratt Developments and Persimmon have risen by 52 and 35 per cent respectively
And while some investment experts warn of a possible housing market correction hitting profits housebuilders make from new builds, most believe the outlook is positive.
Demand for new homes, they say, will continue to be fuelled by an acute shortage of residential property – and also by the desire of many people to take advantage of changing working practices brought about by the pandemic and move to more suburban or rural locations.
Richard Hunter, head of markets at wealth manager Interactive Investor, says many housebuilders were well placed as they went into the pandemic last year.
On the back of a strong housing market, their financial position has strengthened, resulting in the likes of Persimmon and Taylor Wimpey continuing to pay punchy dividends.
Susannah Streeter, senior investments and market analyst at Hargreaves Lansdown, is a fan of Taylor Wimpey.
She says: ‘It has been on a spending spree, buying land in prime locations to keep up with demand. While some of its peers tightened their budgets in response to the pandemic, it seized the moment and snapped up some cheaper housing plots.
‘If it maintains its build momentum and brisk house sales continue, the group could come one step closer to its goal of delivering profit margins on sales of more than 21 per cent.’
But it isn’t just house builders that investors should look at to take advantage of the buoyant housing market. Companies that supply the materials used in new builds are also worth close scrutiny.
They include brick manufacturer Ibstock, which has recently revived plans to spend £60million on revamping two factories in the West Midlands in response to rising demand for bricks – and also door and window manufacturer Tyman.
Another beneficiary of the housing boom has been flooring supplier Headlam, the UK’s largest distributor of carpets, vinyl and wood coverings.
It saw a good recovery in sales in the second half of last year and has forecast a busier period ahead as the economy reopens.
DIY retailer Wickes has benefited from a surge in people embarking on home improvements.
While the appetite for DIY may wane a little as furloughed workers return to work, analysts believe sales should remain brisk – although Wickes warns that supply shortages are pushing up prices across its product range.
Investing in property via an equity fund
Jason Hollands of wealth manager Tilney lives in Kent and says it’s ‘incredible’ to see so much major housebuilding activity underway.
He is not surprised that a number of UK investment funds have ‘filled their boots’ with shares in housebuilders, suppliers of building materials and companies involved in home furnishings and DIY.
He says: ‘One of the investment funds most exposed to housebuilders is Man GLG Income.
It has nearly 11 per cent of its assets in stocks such as Bellway, Barratt Developments, Redrow and Taylor Wimpey.’
Country life: Housebuilders have benefitted from an increased desire to move out of cities during the pandemic, as people have embraced new ways of working
Another attractive property-oriented fund, says Hollands, is Ninety One UK Special Situations.
Its has big positions in a number of builders merchants and suppliers including Grafton Group (5.2 per cent) and Travis Perkins (3.9 per cent). It also has stakes in Wickes, Redrow, Barratt Developments and Taylor Wimpey.
Meanwhile, fund Jupiter Income has a 5.1 per cent holding in B&Q owner Kingfisher.
Axa Framlington UK Mid Cap has exposure across housebuilders and suppliers, including Grafton Group, Bellway, furniture business Dunelm Group, construction materials company Breedon and home improvement and landscaping firm Marshalls.
Hollands adds: ‘A buoyant residential property market is also welcome news for estate agents and property portals – the likes of Rightmove.’ Investment fund Baillie Gifford UK Alpha has more than seven per cent of its assets in the FTSE100 listed company.
Moira O’Neill, head of personal finance at Interactive Investor, says: ‘For those seeking to obtain exposure to residential property, investment trust TR Property could provide a good solution.
‘It is the only investment trust which invests mainly in the shares of property companies rather than physical property. Almost 30 per cent of the trust is invested in residential property and its shares provide a dividend income equivalent to around 3.3 per cent.’
Ben Yearsley, a director of financial adviser Shore Financial Planning, likes Man GLG Undervalued Assets – a fund that has stakes in Redrow, Bellway, Irish housebuilder Glenveagh, Barratt, Tyman and Breedon.
He is also a fan of Fidelity Special Situations and investment trust Fidelity Special Values, which have 11.6 per cent and 13.7 per cent exposure respectively to housing related companies.
And what about commercial property?
The commercial property sector – offices, shops and industrial units – is going through a major state of flux. It means investors need to tread carefully if they want to make money.
Hargreaves Lansdown’s Streeter says: ‘Despite the reopening of the high street, the shift to digital sales shows little sign of reversing and it is likely to tick up as new-found buying habits become hard to break.
‘That’s likely to continue to benefit property companies servicing the e-commerce revolution such as investment trust Tritax Big Box. It owns and leases out giant warehouses to a range of tenants that include Ocado, Next and Amazon.’
Keith Bowman of Interactive Investor agrees. He says real estate investment trusts such as Tritax Big Box and Segro have benefited from the sustained consumer desire to shop online.
He says: ‘Segro, the largest UK real estate investment trust by market value, has tenants that include Sainsbury’s, Amazon and Tesco-owned Booker.
‘It has suffered little adverse impact on rental collection during the pandemic. Segro’s shares are up by more than 50 per cent since the pandemic-induced market low back in March last year while shares in Tritax Big Box have almost doubled over the same period.’
Bowman says the Covid crisis has been much tougher for the likes of office and shop owner Land Securities. ‘Pandemic lockdowns closed most of its retail and leisure properties impacting its 2020 rent collections,’ he says.
But Bowman says the easing of Covid restrictions and a return to the trust paying dividends has brightened prospects, helping its share price rise by around a quarter since March last year. He considers the trust’s shares a buy.
Another trust favoured by Interactive Investor is BMO Commercial Property. It offers shareholders a monthly income equivalent to around 3.5 per cent a year.
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