The share price performances of housebuilders Taylor Wimpey (LON: TW) and Redrow (LON: RDW) have been extremely poor over recent months. Indeed, they have fallen by 32% and 21%, respectively, since the start of the year.
Reasons for their decline include rising interest rates that are making new homes less affordable for prospective buyers. The UK’s economic outlook has also sharply deteriorated as rising inflation has prompted a cost-of-living crisis. And with cladding costs causing both firms to increase their provisions for remedial works over recent months, it is perhaps unsurprising that investor sentiment towards them has weakened.
Financial strength
Of course, both firms appear to have the financial means to survive a period of economic uncertainty. Taylor Wimpey has a net cash position of £837m, while Redrow’s net cash is £242m. This provides a buffer for the two firms that means they will be under far less pressure should a housing market downturn materialise.
It may even allow them to capitalise on lower land values, should they arise, in order to improve the long-term prospects for their bottom lines. Taylor Wimpey followed such a course of action in 2020 while Covid-19 diminished the UK’s economic prospects and prompted buying opportunities for firms with long-term outlooks.
Short-term versus long-term prospects
Clearly, though, investor sentiment could weaken further if the UK’s economic outlook deteriorates. Therefore, a continuation of their recent downward share price trend cannot be ruled out over the short run.
But over the long term, the housebuilding industry is likely to experience a buoyant performance. Demand for housing remains at elevated levels due to a longstanding undersupply of new homes. Despite repeated government efforts to correct a demand/supply imbalance, factors such as a rising population mean that it is unlikely to be successful over the coming years.
In fact, England’s population is expected to rise by around 175,000 per annum over the next 15 years. Over the past 44 years, housing starts have averaged roughly 150,000 per year. Although not every individual will require a home in future, the figures suggest there is unlikely to be a dramatic change in the current relationship between demand and supply.
Investment potential
Following their recent share price falls, Taylor Wimpey and Redrow now trade on exceptionally low valuations that suggest they offer wide margins of safety. Their price-to-earnings ratios currently stand at 6.2 and 5.8, respectively, which indicate that they offer significant scope for upward reratings.
Indeed, even if earnings growth proves to be somewhat sluggish over the coming years, improving investor sentiment towards the wider equity market could lead to relatively attractive returns for holders of both stocks.
Of course, housing is like any other market. It experiences booms and busts over the long run. In the short term, a decline in house prices and/or reduced activity is very possible, and would not be conducive to share price growth for either firm. But with solid financial positions, low valuations and sound long-term prospects, they appear to offer favourable risk/reward opportunities.