The UK housing market has enjoyed a hugely prosperous period in recent years. Low mortgage rates have meant demand for houses has been high, while the supply of new homes continues to fall well below the required level given population growth and changing lifestyle trends. This has caused house prices to rise and the profitability of housebuilders to do likewise.
With the risks from Brexit now being relatively high and house prices falling in the first part of the year, now could be a good opportunity to buy housebuilders. Here are two prime examples of stocks which offer upbeat growth potential at dirt-cheap prices.
Better-than-expected outlook
Barratt Developments (LSE: BDEV) reported upbeat results on Wednesday. The housebuilder said that its performance since the start of the year had been strong, and it now expects pre-tax profit to be at the top end of forecasts. This is due to strong sales, with completions at their highest level for nine years. Market conditions have remained positive, with higher competition in the mortgage market and the continued availability of Help to Buy supporting housing demand.
Looking ahead, Barratt expects to drive operational improvements throughout its business. It is focused on improving its operating margin, while delivering a return on capital employed (ROCE) of 25% or above. In terms of profitability, the company’s bottom line is expected to rise by 2% this financial year, and by a further 4% next year. While below the wider index’s forecast growth rate, it remains relatively strong given the uncertain prospects for the housing market.
Trading on a price-to-earnings (P/E) ratio of 11.1, Barratt appears to offer excellent value for money at the present time. Its mix of an improving business model, favourable long-term growth prospects in the housing market and a low valuation suggest it could deliver index-beating performance in future.
Low valuation
It’s a similar story with Inland Homes (LSE: INL). The specialist property company trades on a valuation which suggests it offers a wide margin of safety. It has a P/E ratio of just 8.5, which indicates that now could be the right time to buy it. Part of the reason for its low valuation is a share price fall of 18% in the last year, although a rise of 8% in the last six months suggests that investor sentiment may be starting to pick up.
As well as being cheap, Inland Homes also has dividend growth potential. Its shareholder payouts are expected to be covered 5.3 times in the current financial year. This suggests that a rapidly-rising dividend could be ahead, which would help to improve on its dividend yield of 2.2%. And with earnings due to rise by 3% in the next financial year, the company’s performance looks set to improve after a difficult period.
Certainly, Inland Homes faces a degree of uncertainty from Brexit and the potential for further house price falls. But with a low valuation and dividend growth potential, it could deliver a rising share price in the long run.