The UK housebuilding sector has been one of the best performing sectors since the 2008 financial crash. It has been riding the wave of positive macroeconomic data that has created record profits. I want to ask the question, is the ride over or is there still growth potential in UK housebuilders?
Bull market
In recent years the UK economy has seen perfect conditions for housebuilders. This very cyclical sector has been rising since the 2008 financial crisis as the UK economy has recovered and grown steadily. The UK housebuilding stocks have reached all-time-highs on the back of this and are returning vast amounts of cash to shareholders in the form of dividends.
What does the future hold?
The UK has a serious housing shortage that may become a real problem in years to come. This is why I believe that UK housebuilders still have potential to create returns for investors buying now. One element of caution is a potential interest rate rise, this could cool the housing market across the country. However, the Bank of England is likely to raise interest rates very slowly to prevent a shock to the UK economy. This should protect the housing market and provide good trading conditions.
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Which shares should you buy?
Berkeley Group (LSE: BKG) looks relatively undervalued compared to its peers in the sector. Currently it’s trading on a 13.1 PE ratio and yield of around 5.4% with a clean balance sheet. Berkeley differs from its peers due to its focus on London and the South East of England, which has provided the company with bumper returns as the housing market has skyrocketed in the capital.
Another company that has a fantastic dividend yield is Persimmon (LSE: PSN). Persimmon is currently yielding around 5.3% and will be able to ramp up future dividend payments. The company also has a PE ratio of around 13, which is expected to drop to just above 11 by the end of the year. The shares have lost a bit of steam in the last three months but I see that as a good buying opportunity for investors looking to ride the housing sector wave.
Taylor Wimpey (LSE: TW) is another way to play the UK’s housing market. Shares are very close to all-time-highs but this shouldn’t put investors off. Similar to its peers, Taylor Wimpey has a chunky dividend yield of 4.9% rising to a whopping 5.7%, earning have steadily grown and show no signs of stopping. In a recent update, the company spoke of a continued positive outlook on the sector.
Housebuilders have risen by several hundred percent in the last few years but they still have further to go. By following the momentum and buying into the above stocks you could make good gains through the last leg of the cycle. The high dividend yields covered well by cash add to the investment case and could provide a great dividend stream for years to come.
