Robert Stephens, CFA, discusses the investment potential of three FTSE 350 housebuilders amidst a challenging period for the industry.
The stamp duty holiday has kick-started the housing market into life. According to Rightmove, asking prices have never been higher. Potential purchasers are being lured back into the market with the promise of zero stamp duty on the first £500k of a property’s purchase price. This means that around 90% of homebuyers will not pay any stamp duty over the next eight months.
The temporary cut in stamp duty could be good news for FTSE 350 housebuilders such as Taylor Wimpey (LON:TW), Vistry (LON:VTY) and Redrow (LON:RDW). In my view, they could offer attractive returns in the long run.
Potential catalysts
As well as the stamp duty holiday having the potential to stimulate demand for new homes, other factors could catalyse the UK housing market. For instance, record low interest rates will help to make housing more affordable, which could encourage a larger number of first-time buyers onto the property ladder.
As ever, there is a lack of supply versus demand in the UK housing market. Despite repeated government efforts to encourage a higher volume of housebuilding over the past decade, the forecast rise in the number of new households in the UK each year currently surpasses housing starts. This could put further upward pressure on prices, and encourage strong demand for new homes across the housebuilding sector.
Solid financial positions
Taylor Wimpey, Vistry and Redrow seem to have sound financial positions that could help to protect them from an uncertain economic outlook. For instance, Taylor Wimpey has a net cash position of £497 million, while Vistry and Redrow have modest net debts of £355 million and £126 million respectively. Therefore, they appear to be in solid positions to not only survive the short run, but to also benefit from weaker asset prices within the sector.
For instance, Taylor Wimpey recently raised over £500 million in a share placing to take advantage of lower land prices. This could allow it to generate relatively high returns in the long run through investing at an opportune moment in the housing market cycle.
Possible threats
As with many industries, housebuilders face potential threats that could derail their financial progress. For instance, unemployment is likely to rise significantly over future months. This may reduce overall demand for new homes as potential buyers postpone major purchases due to job insecurity in a weak economy.
Equally, it is currently unclear whether Covid-19 cases will spike this winter. If there is a ‘second wave’ of cases, potential homebuyers may determine that now is not the right time to purchase a property. There is also the potential for government support to change, or even end. For instance, the Help to Buy scheme is due to be scaled back in future months.
Outlook
However, with solid financial positions, a likely rise in demand for new homes in the short run, and share prices that are at least 35% lower than they were at the start of the year, Taylor Wimpey, Vistry and Redrow seem to offer investment appeal. They may experience great uncertainty at times in future, but a lack of supply versus demand for new homes in the UK could drive their sales and profits higher.