Robert Stephens, CFA, discusses the investment appeal of two FTSE 250-listed housebuilders – Bellway and Redrow.
This week’s widely anticipated budget contained good news for housebuilders Redrow (LON:RDW) and Bellway (LON:BWY). The Chancellor unveiled a mortgage guarantee scheme that will make it easier for buyers with small deposits to get onto the property ladder.
Under the proposed scheme, the government will provide a guarantee to lenders. It is designed to act as an incentive so that they offer mortgages that are up to 95% of a property’s price.
Alongside this, the Chancellor announced an extension to the stamp duty holiday. It will now end in June instead of March for properties under £500,000, and run until the end of September for properties under £250,000.
Growth opportunities for housebuilders
The Chancellor’s housing policies could have a positive impact on the financial prospects of Redrow and Bellway. They currently rely on the Help to Buy scheme – which allows buyers to put down a 5% deposit when purchasing a new home – to a greater extent than many of their peers.
For instance, 29% of new homes are currently purchased through the Help to Buy scheme. However, Bellway relied on the scheme for 35% of homes it sold in the 2020 financial year. Meanwhile, 44% of Redrow’s private reservations in its most recent half year came through Help to Buy.
The government’s guarantee scheme could ensure that homebuyers with small deposits can access a wide range of mortgages. This could be key to the prospects for both companies. After all, the proportion of average incomes spent on mortgage repayments remains close to a long-term average of around 30% due in part to low interest rates. By providing a means of buying homes with small deposits, demand for new homes could remain robust in future.
Investment potential
Of course, the Chancellor’s budget also highlighted the economic difficulties facing the UK. Factors such as rising unemployment could act as a drag on the housebuilding sector. Similarly, weak consumer confidence and potential delays to the end of lockdown could act as deterrents on housing market activity in the coming months.
However, Bellway and Redrow appear to have the financial strength to overcome such threats. They have net cash positions of £346m and £238m respectively. Their large land banks show that they are well positioned to deliver the new homes needed across the UK.
On this topic, the number of new homes being built in the UK has historically been lower than demand growth. A continuation of this trend may prompt upward pressure on prices, while continued low interest rates could help to maintain current levels of affordability across the sector.
Valuations
Despite their potential to deliver long-term growth, Bellway and Redrow appear to trade on modest valuations. For example, they have forward price-earnings ratios of 10 and 9, respectively. This suggests that investors may not yet have priced in their future prospects.
With mortgage availability likely to remain high, interest rates set to stay low and an economic recovery forecast over the next few years, Redrow and Bellway could offer relatively attractive share price returns.