Housebuilders have been having a good year with profits boosted by the government’s Help to Buy scheme, relaxed planning laws and increasing house prices. However the share prices tell a different story with drops of around 20% across the board this year. It’s always dangerous to try and catch a falling knife but I think the Autumn Budget may be the catalyst for a change of momentum and it saw Help to Buy being extended for two years (but restricted to first-time buyers purchasing newly-built homes).
This scheme provides first-time buyers with an interest-free loan of 20% for new homes. The policy has been heavily criticised over its effectiveness and overall impact, but regardless of its effectiveness, construction companies now have more buyers with more money to target.
There has also been further support for the sector with a £500m top-up of the housing infrastructure fund.
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So why the falling share prices? Well, they could be part of the cyclical nature of construction stocks but I think they are more likely because of house price crash fears post-Brexit. There is certainly a risk here, but readers of my last article will know I think that it will be business as usual before too long. We don’t know what the Brexit result will be, but we do know that there is a shortage of new homes and this isn’t going to change after Brexit.
Bargains across the board
FTSE 100 component Barratt Developments (LSE:BDEV) has fallen over 19% in the past year and now has an exceptionally low price-to-earnings ratios (P/E) of 7.3. This means if it delivered identical earnings-per-share (based on final year results) for the next 7.3 years, your original investment would be repaid. Some of this EPS would be reinvested by the firm, of course, but Barratt also pays a dividend of 8.7%. I think this dividend is ridiculously high for a FTSE 100 company and is a consequence of the recent sharp fall in the share price combined with a set of prediction-beating results over the summer. These good results defied negative sentiment around the construction sector as London prices grew against expectations.
It’s a similar story with Newcastle-based housebuilder Bellway (LSE: BWY) which has fallen over 20% in the past year. Bellway has the advantage of most of its developments being outside London and the south east. These are seen as the danger areas if Brexit causes an exodus of businesses from the UK. A member of the FTSE 250, Bellway has an incredibly low P/E of 6.3 and a very respectable dividend of 5.3%. It has built 10,000 homes in the UK for the first time this year and has been buying up land for further developments.
On the watchlist
Both of these companies have been growing revenues and profits, and pay good dividends. The falling shares have defied their healthy growth and I think that they are both exceptional value.
The cyclical nature of construction stocks is why they tend to be good value, as the construction industry is the first to falter in a downturn when margins can disappear and they can operate with losses to maintain infrastructure. So far, Brexit recession fears have been unfounded so I’ll be keeping an eye on the news. If the market starts to change its mind on these shares, I will be looking to add them to my portfolio.
