Although property companies at this stage in the economic cycle have fallen out of favour with many investors, you’ll still find contrarians such as Neil Woodford placing big bets on homebuilders and related firms. And while I’m avoiding his holdings such as Taylor Wimpey and Barratt Developments, there is still one property developer that’s caught my eye.
That’s MJ Gleeson (LSE: GLE), which builds homes on brownfield land in what it terms “challenging communities” in the North of England. This means marketing homes with an average selling price of £124,000 to low income buyers who are generally ignored by bigger homebuilders.
This is appealing to investors for several reasons. For one, purchasing former industrial land, reclaiming it and rezoning it into housing stock means the company can buy its properties for very low prices compared to rivals.
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Furthermore, selling homes at relatively low prices means the company is insulated from external issues such as the increased stamp duty, strengthening pound or Brexit-related worries that are creating headaches for developers in the south of the country.
This is borne out in the company’s financial results for the half year to December, when an increase in housing plots sold and rising prices buoyed revenue by 34.7% to £73.7m for its homes division, while operating profits jumped 44.7% to £12.3m.
Improved margins boosted the group’s period-end net cash balance to £26.7m and allowed management to increase its interim dividend payout by 38.5% to 9p per share. With its shares trading at just 14.6 times earnings, a 3.6% dividend yield and solid growth prospects, I think MJ Gleeson could be an attractive option for investors wanting exposure to the property sector.
All its eggs in one basket
On the other hand, I’m steering well clear of London developed Capital & Counties (LSE: CAPC). The company has two developments, one in progress in Earl’s Court and another already well established in Covent Garden.
And while the Covent Garden estate continues to perform well, with its value increasing by 4.3% year-on-year on a like-for-like basis, the Earl’s Court development’s value plummeted by 11.8% during the year. Management blamed political and economic uncertainty for the falling value of this development and for the time being it looks like these twin problems will continue to haunt developers as Brexit negotiations drag on.
For now this isn’t a huge issue as the Earl’s Court development is still very much a work in progress and Capital & Counties is a long-term developer with low levels of leverage. However, over the long term, the company’s prospects still rely entirely on continued gains for property prices in London.
And while London property has proved resilient in previous downturns, I’m not entirely convinced the capital’s housing market can continue to appreciate astronomically forever, especially as Brexit begins to bite in a few years’ time. With that in mind, there’s little chance I’ll be investing in Capital & Counties any time soon.
