Is now the time to invest in UK housebuilder shares?

Safe as houses’ is usually an adage for investing in something to get you through troubled periods. But those who sought to build their share portfolios on bricks and mortar have had a tough time of late. 

While shares growth soared at times during the pandemic (and even as recently as April) the values of the big housebuilders have suffered much the same fate as the Three Little Pigs’ houses of straw and sticks. They’ve collapsed. 

Since the start of the year, shares in Barratt Developments, Persimmon and Vistry (previously known as Bovis Homes) have fallen by 39, 40 and 29 per cent respectively. 

Building for the future: There are plenty of analysts and financial experts who believe that now is the time to buy into the sector

The reason? The stock market is a forward-looking index – and investors are more worried about what’s on the horizon than what is happening now. 

Higher raw material costs, labour shortages and a cost-of-living crisis that might make homebuyers think twice about a new purchase have ensured that sentiment towards the sector is wobbly to say the least. 

‘Who would be a housebuilder right now?’ asks Rob Burgeman, senior investment manager at wealth manager Brewin Dolphin. ‘The sector is facing economic headwinds that look likely to present challenges in the near term.’ 

The big comfort factor for housebuilders is that house price inflation is still rattling along at a fair lick – 7.8 per cent a year, according to the latest data from the Office for National Statistics. 

Even though you would be brave to believe that the Big Bad Wolf of inflation won’t blow the housebuilders down, there are plenty of analysts and financial experts who believe that now is the time to buy into the sector. 

Almost every stock market analyst has a ‘buy’ or ‘outperform’ rating on these stocks, with Richard Hunter, head of markets at wealth platform Interactive Investor, describing market consensus as ‘defiantly optimistic on prospects’. 

He adds: ‘In different times, the current state of the housebuilding sector would be the cause of some celebration. 

‘There is, however, an increasingly yawning gap between trading performance and share price performance. The sector is performing well, profits are being made and dividends paid. But the shares are going nowhere.’ 

Laith Khalaf, head of investment analysis at rival wealth platform AJ Bell, says that the recent fall in the share prices of the housebuilders presents an opportunity for investors. 

He says: ‘The stock market has marked housebuilding shares down in anticipation of a property market decline. Decent dividends in the sector mean investors are being paid to wait for a reversal of fortunes in share prices.’ 

He adds: ‘As Warren Buffett has said on many occasions, ‘Buy when others are fearful’.’ 

How Britain’s builders are standing firm 

Housebuilders might seem to have a lot going for them, but it is important to be selective as an investor. Just like in the story of the Three Little Pigs, you need to ensure you’ve studied the right materials before building a portfolio (or a woodland cottage). 

It is easy to lump all the companies in Britain’s housebuilding sector in to one category, but the builders have different pros and cons. 

Shares in some have fallen far further than others, while would-be investors should also consider their different market positions, current stocks of land for building and levels of cash in the bank. 

Like would-be homebuyers, you are looking for an asset with ‘good bones’ – sturdy, well-constructed and at an attractive price point. 

The first thing to note is that not all companies have seen comparable collapses in share prices. While shares in Persimmon have fallen 40 per cent since the turn of the year, those in Berkeley Group have fallen just 20 per cent. 

Simon Gergel is manager of investment trust Merchants, a £770million stock market-listed fund that invests in high dividend-yielding UK companies.

He says shares in the likes of Redrow are sitting at a significant discount to the value of the assets the company owns – in other words, the shares are seriously undervalued. 

Different housebuilding companies also focus on different sectors of the UK homes market. Brewin Dolphin’s Burgeman likes Berkeley because of its emphasis on the affluent London and South East housing markets – and its objective of building ‘quality homes’. 

He particularly likes the income that the shares deliver, equivalent to 2.85 per cent a year. While this is lower than many of its peers – for example, the income from Barratt shares is equivalent to 6.5 per cent a year – Burgeman believes it is more sustainable long term. 

A Berkeley development in Kidbrooke, South East London. Brewin Dolphin’s Burgeman likes Berkeley because of its emphasis on the affluent London and South East housing markets

Charlie Huggins is head of equities at investment service Wealth Club. He likes Berkeley because of its focus on long-term urban regeneration projects. 

He says: ‘None of this makes Berkeley immune to the impact of a housing crash, but it does put them in a stronger position than most rivals.’ 

The drawback is that shares in Berkeley are more expensive than others, so those looking for a bargain might consider its rivals. 

Burgeman says that Persimmon, which four days ago produced pretax profits for the first six months of £440million (last year: £480million), ‘is a good company’. 

Its dividends, equivalent to 13 per cent a year, are attractive. 

Adam Vettese, analyst at social investing network eToro, says the company (like all housebuilders) will come under pressure if house prices soften. 

But he adds: ‘Two of the most important indicators of future health are Persimmon’s profit margin and its future sales position, both of which are heading in the right direction – up.’ 

Other investment possibilities include Barratt and Taylor Wimpey, both providing income of around seven per cent per annum. Barratt’s management team breathed a huge sigh of relief when the Competition & Markets Authority recently dropped a misselling investigation citing ‘insufficient evidence’. 

Last month’s trading update on the business was also upbeat, despite the firm acknowledging economic clouds on the horizon. 

Taylor Wimpey’s recent results beat expectations, with Charlie Campbell, housebuilding analyst at investment house Liberum, placing a ‘buy’ on the stock.

Look to the horizon: Housebuilder shares are fairly cheap compared to other sectors, in part due to the position we are at in the property cycle – but things could improve in the long term

Invest long term for a fairytale ending 

While many investment experts are upbeat on the prospects for housebuilders, it is still important to concentrate on what is on the horizon – which is, of course, why these shares are relatively cheap compared to other sectors. 

James Yardley, senior research analyst at fund scrutineer Chelsea Financial Services, says UK housing is a cyclical industry and has been in a ‘super cycle’ (where times are good) for the last ten years. That’s now ending, he believes, and housebuilders’ profits will reduce as the housing market slows and cost pressures rise. 

‘Profits can quickly disappear in the housebuilding industry,’ he says. ‘Generally, now in the cycle is a bad time to own housebuilders.’ 

Yet he is more upbeat in the longer term. ‘The market has already priced in a lot of negatives,’ he adds. 

‘Investment-wise, I would probably stay away at the moment, but I would be ready to pounce if and when the economic backdrop looks a little rosier.’ 

In short, housing might sound like a solid and stable investment, but don’t expect an easy ride – especially in the short term. 

But if you can stay invested for long enough to withstand all the Big Bad Wolves at the door, you might end up with a fairytale ending. A part of an overall investment portfolio. But just one piece of the jigsaw.

Fund can make a strong foundation 

Not everyone wants to buy individual shares. But there are ways to get access to housebuilders through some of the country’s leading investment funds. 

Dzmitry Lipski, head of funds research at Interactive Investor, says fund Man GLG Income has stakes in Bellway, Taylor Wimpey, Barratt and Redrow. 

The fund is also investing in builders’ merchants, which it believes are attractively priced right now. 

He says: ‘Man GLG Income looks for companies that will provide its investors with a mix of capital appreciation and income higher than that from the FTSE All-Share Index.’ 

The index is currently providing an annual income of around 3.4 per cent. 

The fund has generated a return of 20 per cent over the past three years – 4.6 per cent over the past 12 months. 

AJ Bell’s Laith Khalaf says that Franklin UK Mid Cap and Man GLG Undervalued Assets both have housebuilders in their top 10 holdings. Franklin UK Mid Cap, a shareholder in Redrow, has delivered a return of 9 per cent over the past three years, but has incurred losses of 17 per cent over the past year. 

Man GLG Undervalued Assets has posted positive returns of 1.7 per cent and 14 per cent over the past one and three years. Like Franklin UK Mid Cap, Redrow is one of its top 10 holdings. 

Fund Jupiter UK Dynamic has Persimmon as a top-ten holding. This fund’s performance has suffered badly in the past year, recording losses of 29 per cent.

This post first appeared on Dailymail.co.uk