Why the property sector could be boom or bust for investors

The UK property sector offers a significant investment opportunity for the long term. There is a fundamental lack of supply of housing, while demand remains high. Population growth is forecast to significantly exceed the number of new homes built over the next decade, so this situation is unlikely to change.


However, within the UK property market there is an evolution taking place. Estate agents are struggling with a decline in new listings, while a move towards lower-cost online options is hurting their fees. Therefore, while housebuilders may generate high returns from a bright future for the housing market, estate agents could underperform.

A growth opportunity

Recent trading updates from major housebuilders such as Persimmon (LON:PSN) and Taylor Wimpey (LON:TW.) show that their trading conditions remain favourable. Average realised sales prices are on the up and demand remains robust due to an imbalance between demand and supply. With the UK’s population forecast to rise by 415,000 per annum between now and 2027, the supply shortfall is set to worsen since less than 150,000 houses are currently being built per year.

With the UK’s population forecast to rise by 415,000 per annum between now and 2027, the supply shortfall is set to worsen since less than 150,000 houses are currently being built per year.

Further, low mortgage rates continue to support prices even though they are now close to an historic high when compared to average earnings. Interest rates may rise in the coming months and years, but the appetite for a ‘normalisation’ of interest rates seems to be lacking. The Bank of England may not wish to risk choking-off UK economic growth at a time when business confidence could sour due to Brexit.

Disruption

However, investment opportunities within the estate agency segment of the property industry seem less obvious. The sector is undergoing rapid change, with low-cost online offerings proving disruptive to the traditional estate agency model. The success of companies such as Purplebricks (LON:PURP) is likely to increase as stamp duty becomes a larger cost for many people moving home.


In addition, a consumer which is more comfortable in both buying and selling houses using online services is beginning to emerge. This may lead to traditional estate agencies becoming inefficient in comparison, and even obsolete. And with a lack of significant barriers to entry, competition could soar at a time when new property listings are at a low ebb.

A disruptive opportunity?

Whenever any industry experiences disruption, there is always opportunity for investors. However, housebuilders are mostly cheap at the moment, while estate agents are generally relatively expensive. For instance, an online-focused estate agency such as Purplebricks has a prospective P/E of 245 versus just 11.5 for a housebuilder such as Persimmon.

Certainly, the former may offer higher growth than the latter. However, the major housebuilders have a vice-like grip on the industry. They own vast amounts of land and this makes it difficult for new entrants to prosper. In contrast, an online-focused estate agency has small initial capital requirements, which means competition could intensify.

Therefore, housebuilders may offer greater longevity. Combined with their lower valuations and the solid growth opportunity they offer, they appear to be the more attractive place in which to invest in order to gain access to the highly lucrative UK property market.

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