Investor sentiment towards the housebuilding sector deteriorated significantly in 2018. That’s unsurprising, since the prospects for the economy ahead of Brexit appear to be uncertain. With a vote on the Prime Minister’s Brexit plan expected to be voted down in Parliament next week, the political and economic outlook for the UK could become increasingly volatile.
While this may cause shares in FTSE 100 housebuilders Taylor Wimpey (LON:TW) and Barratt (LON:BDEV) to come under pressure, the two stocks appear to offer margins of safety after having fallen by over 20% apiece in the last year. With government policies such as Help to Buy expected to remain in place, and there being a lack of supply versus demand for new homes, both shares could offer long-term recovery prospects in my view.
With Brexit less than three months away, a lack of certainty regarding a deal between the UK and EU is causing investors to become increasingly cautious. Although a number of international stocks have been hurt by risks such as a rising US interest rate, the threat of a slowing Chinese economy and deteriorating trade relations between the US and China, Brexit has contributed to the unpopularity of UK-focused shares in recent months.
Uncertainty could rise over the next few months. The Prime Minister’s Brexit plan seems to be a non-starter among MPs. Since there are a number of differing views within the House of Commons on how Brexit should (or should not) be delivered, finding a deal which can carry a majority seems to be challenging. This may increase the chance of a no-deal scenario, which appears to be viewed as unfavourable by many investors.
Although the share prices of UK-focused companies such as Taylor Wimpey and Barratt could fall in the short run if Brexit uncertainty increases, both stocks could offer long-term growth potential. There continues to be a shortage of housing in the UK. While the number of property completions has risen in recent years, it remains below population growth forecasts. For instance, England is forecast to have an additional 210,000 households per year through to 2039. In 2017, 184,000 new homes were completed in England.
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Demand for new homes is set to be supported by continued low interest rates, as well as government policy. Although both of these factors could change in the medium term depending on how Brexit proceeds, valuations across the housebuilding sector appear to price in potential risks. Taylor Wimpey, for instance, has a P/E ratio of 7, while Barratt’s P/E ratio is slightly higher at 7.5.
The two companies have large land banks, as well as net cash positions. They have prospective dividend yields of 12% (Taylor Wimpey) and 9% (Barratt) for the current financial year. As a result, they appear to have a mix of value and income investing potential. Although it may not appear as though they are capable of delivering growth, given the uncertainty facing the wider economy ahead of Brexit, a continued housing shortage suggests that they may deliver impressive recoveries over an extended time period.