Hot property stocks could help you cash in on Britain's building boom

The average UK house price stands at a record high of £262,954, according to Halifax. Some of this rise is attributable to the stamp duty holiday. 

But, as this concession ends, it seems as though what Stuart Law of the lender Assetz calls ‘deep-rooted changes in consumer trends brought on by the pandemic’ are becoming set in concrete.

Lockdown appears to have permanently raised the value that the British place on property. 

The pace of growth may be slowing, as the latest survey from RICS, the surveyors’ body underlines. But some expect a second wave of demand in 2022. 

So, since mortgage rates are falling to record lows – and tipped to become even cheaper in 2022 – are the Halifax figures, supported by data from Nationwide, a signal to buy shares in housebuilders? 

The Government’s controversial planning reforms, intended to produce thousands more new homes, may be watered down in response to ire in the shires. 

However, the acute housing shortage must still be addressed. 

Moreover, if Boris Johnson wants to attract young voters, he must deliver on his pledge to turn Generation Rent into Generation Buy – if only to compensate for the shock imposition of extra national insurance on this age group. 

Since politicians can promise homes, but must rely on housebuilders to build them, the sector’s giants will be crucial to the delivery of these policies. 

They are: Barratt whose market capitalisation is £7billion, Bellway (£4.2billion), Berkeley (£5.2billion), Persimmon (£8.7billion) Redrow (£2.5billion), Taylor Wimpey (£6.1billion) and Vistry (£2.6billion). 

But how do you choose, and what are the risks? 

This week, Vistry complained of a scarcity of bricklayers and plasterers. But there are other shortages too. Barratt, Berkeley, Vistry and the rest may boast bulging order books. But they are being hit by increases of 4-5 per cent in material costs, and by logistical issues arising from Brexit. 

They will also be liable for a tax to remove unsafe cladding. Help to Buy, the taxpayer-funded scheme that has been a boon to the whole sector supporting sales and enriching executives, ends in March 2023. 

Will it happen? It is rumoured that Barratt, which sits on a £1.3bn pile of cash, may pay a special dividend next summer, although there is no confirmation of this

Will it happen? It is rumoured that Barratt, which sits on a £1.3bn pile of cash, may pay a special dividend next summer, although there is no confirmation of this

These concerns have weighed on housebuilder shares this year. But suddenly, thanks to the property market’s unexpectedly bravura performance, there is more enthusiasm for the sector. Share prices of its members tend to move in tandem, either upwards or downwards, as they are subject to roughly the same macro-impacts. 

Glynis Johnson of Jefferies, the brokers, contends that housebuilder stocks ‘are still too cheap’, and that there could be an upturn towards the end of the year when bosses provide updates.

Johnson also cites the sector’s dividend yields of 4 per cent-plus. 

It is rumoured that Barratt, which sits on a £1.3billion pile of cash, may pay a special dividend next summer, although there is no confirmation of this. 

Supporters of the housebuilders contend that the obstacles in the way of progress are outnumbered by the opportunities. 

Nobody is a superfan – and superfans always make me suspicious. I prefer a sober assessment of any investment.

Neil Hermon, portfolio manager of Henderson Smaller Companies Investment Trust, says: ‘Construction costs may be going up, but that is being offset by increases in house prices. Margins are not being affected.’ 

He continues: ‘We know that there will a cladding tax to raise £2billion. This may mean a 3 per cent tax on housebuilders’ profits, although this has yet to be decided. 

‘But the market is already discounting this. Also there are structural pressures – thanks to planning constraints, Britain does not have enough houses.’

Bellway, whose shares have risen by 17 per cent so far this year, is one of the trust’s largest holdings. 

Hermon says the firm has ‘a good national spread, a very good management team – and its balance sheet is incredibly strong. Because of our concern for ESG, we are engaging with Bellway on the renovation of blocks with cladding’. 

The qualified optimism for housebuilders’ prospects provides a strong argument to continue to hold their shares, or to add a mix to your portfolio. 

You may already be an investor through such trusts as Aurora which has stakes in Barratt and Bellway; Fidelity Special Values and JP Morgan Mid-cap which own Vistry; Independent which has opted for Bellway and Redrow; and Mercantile whose selections are Bellway and Countryside. 

You may deplore some of the housebuilders’ practices or be dismayed by the quality of some of their output. 

However, their central role in the fulfilment of government policies, their dividends and the nation’s heightened ardour for property could be enough to assuage the doubts.

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