Build your wealth with bricks and mortar

The word of the month in the property world is ‘resilience’. It has been used by Halifax to describe the state of the residential market, and by the chief executive of Taylor Wimpey.

Unveiling the housebuilder’s latest results, Jennie Daly said: ‘I am pleased that we have delivered a resilient performance, with first-half completions slightly ahead of our expectations.’

Performance at Bellway has also been ‘resilient’, according to Jason Honeyman, the group’s chief executive.

In light of the gloomy forecasts for house prices, these assessments will seem surprising to some – and delusional to others.

But I would argue that they are a signal to take a closer look at housebuilders, against the background of what Alan Dobbie, co-manager of the Rathbone Income fund, calls ‘our cultural relationship with property – and the long-term structural need for more housing’.

Bricks and mortar: Taking a bet now on housebuilder shares involves looking beyond their falling profit margins, their declining sales and other dispiriting details of their circumstances

At present, housebuilders face huge obstacles. These difficulties are economic and political.

Would-be homebuyers have been hit by sharply higher living and borrowing costs. The average five-year mortgage rate is 6.06 per cent, against 3.81 per cent a year ago. Such has been the increase in rates that there is a new word to describe certain young professionals who have ‘given up on property ownership’– the Guppies.

Both the Government and Labour make much of their aspirations to deliver more homes, with housing likely to be a key general election battleground.

But the official target of building 300,000 homes a year in England was abolished in late 2022, and the Help to Buy scheme was withdrawn in March this year.

Taking a bet now on housebuilder shares involves looking beyond their falling profit margins, their declining sales and other dispiriting details of their current circumstances.

It represents a gamble on the companies’ resilience – which should be supported by their cash reserves and their land banks.

The Artemis Alpha investment trust holds Berkeley Homes, Bellway and Redrow because, as the managers John Dodd and Kartik Kumar point out, ‘the UK faces an accumulated supply deficit of over 1m homes’.

London is calculated to need about 90,000 new homes with a value of under £1m a year. Since 2020, some 30,000 have been delivered. This underlines the extent of the opportunities nationwide, which housebuilders are ready to seize when the time comes.

Richard Donnell, head of research at the Zoopla platform, says: ‘I sense that they are hunkering down until the next election, and hoping for some more leadership on new development and the need for more homes.’

In the meantime, these companies are better positioned than before to withstand the slowdown.

Dobbie says: ‘At the start of the global financial crisis in 2007-2008, the balance sheets of many housebuilders were in a difficult state.

‘But this time around they have been preparing for a downturn, pulling back from land purchases; their balance sheets are strong.’

Rathbone Income has stakes in Taylor Wimpey, Bellway, Redrow and Persimmon and Redrow. Shares in the first four have risen since the start of the year, but Persimmon’s price has fallen by 7 per cent, reflecting the view that it is reliant on first-time buyers.

It would be tempting to assume that you should apportion some cash to all the housebuilders’ shares and sit back and wait for better times. But this may not be a restful experience, given the prediction that the sector’s output may not return to its 2021 level until 2026.

Oli Creasey, equity research analyst at Quilter Cheviot, argues in favour of being more discerning.

He suggests avoiding Persimmon, and also Vistry which has less of a cash buffer than its peers.

He says: ‘In our view Taylor Wimpey is the company best-placed to weather the ongoing storm, with a very comfortable net cash position and one of the lowest overall gearing ratios in the sector – at around 4 per cent.’

The gearing ratio is a measure of company’s debts to shareholders’ capital. Creasey also cites Berkeley. This group is more dependent than the rest on the South East and London, where there is most downward pressure on prices, as Halifax reports. But there should be demand from overseas buyers exploiting sterling’s weakness to acquire prime pieces of London real estate.

Berkeley’s dividend yield is 5.93 per cent. Taylor Wimpey offers 8 per cent. The whole sector is generous towards shareholders.

Think of these payouts as some recompense for the volatility of housebuilder shares, which even the sector’s biggest fans admit that they can find unnerving.

The ups and downs are accentuated by the incessant flow of property news – it is a national obsession, after all.

This post first appeared on Dailymail.co.uk