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The UK housing market is currently experiencing a subdued period which could last for a number of months. Brexit seems to be contributing to reduced confidence in the sector, with house prices rising at a relatively slow pace and it taking longer to sell properties. As a result, housebuilders such as Persimmon (LON:PSN) and Barratt (LON:BDEV) have become relatively unpopular in recent months.
However, the long-term growth of the two stocks could be positive. Their low valuations and income potential could make them worthwhile investments over the coming years.
The Royal Institution of Chartered Surveyors (RICS) reported this week that the average time it takes to sell a property has increased to 18 weeks. This is up from 16 weeks in spring, and shows that demand has come under pressure in recent months. House prices have risen at their slowest pace since 2013 over the last year, according to Halifax, with confidence in the wider market being in short supply.
An obvious reason for the slowdown in the housing market is Brexit. As most investors are aware, it has created a degree of uncertainty about the prospects for the UK economy. This situation could last over a period of months. There is still some way to go before a deal is finalised, with its implementation post-March 2019 likely to create additional uncertainty.
In spite of the short-term risks to the housing market, the prospects for housebuilders such as Persimmon and Barratt remain bright. They both continue to generate improving profit performance, with the government’s Help to Buy scheme and SDLT relief for first-time buyers helping to maintain robust demand for new-builds.
With Help to Buy set to remain in place until 2021, and interest rates expected to be at 2% or below through to 2020, the financial outlook for both stocks seems to be upbeat. They both have strong net cash positions, as well as large land banks. However, investors seem to be pricing-in an exceptionally challenging outlook for the two companies.
Persimmon has a P/E ratio of 9.6 in spite of it being forecast to post positive EPS growth in the current year and next year. Barratt’s shares trade on a P/E ratio of 8.3 even though 5% EPS growth is forecast for the current financial year. With Persimmon’s dividend yield over the next three years expected to be 7.8%, and Barratt having a dividend yield of 8.7% including special dividends, the income potential from the two stocks appears to be high.
Clearly, there is a risk of further deterioration in confidence across the UK housing market. This could hurt the performance of both companies, as well as reduce their valuations. But with large margins of safety, high yields, strong balance sheets and favourable government support alongside low interest rates, their investment appeal may be high. While unpopular at the moment, they could be sound contrarian buys.