While banking shares have benefited from the Conservative election win, they’ve been overshadowed by housebuilders. Shares in Taylor Wimpey (LSE: TW) have climbed 12.5% since election day, with fellow FTSE 100 builder Barratt Developments up 13%. And in the FTSE 250, we see Bovis Homes up 10% and Redrow up 7%.
The drag on housebuilder shares has been all about fears of a slowdown in the housing market in the UK. But the business of building houses does not need rising (or even high) house prices to make its profits. When selling prices are down, so are land prices, and as long as there’s a decent differential, there’s profit to be made.
Resilient market
It does need a steady stream of buyers, but we’re in the middle of a chronic housing shortage, and the top companies are still reporting healthy demand and strong forward reservations. In its November trading update, Taylor Wimpey spoke of “an industry-leading sales rate,” while telling us that “in spite of wider political and economic uncertainty, housing market conditions have remained resilient.”
Tougher mortgage conditions could hurt the business, but Taylor Wimpey addressed that too, pointing to low interest rates an “a competitive mortgage market.”
The biggest real threat was that of a no-deal Brexit, which most economists expect would plunge us into an economic downturn, and that could have a big effect on housing demand. The size of the Conservative majority means the government can press ahead with Boris Johnson’s provisional agreement without any real hindrance, so the no-deal chances should now be greatly diminished (although that’s not guaranteed).
Even after the post-election share price gain, Taylor Wimpey shares are on a forward P/E of just 9.6, and the forecast dividend yield stands at 9.3%. That does include special dividends, but the company has been generating lots of cash with which to pay them, and the cash flow and dividend prospects look very good to me.
My choice
The only reason I’m not actually buying Taylor Wimpey shares is that I already hold Persimmon (LSE: PSN), and that’s sufficient exposure to the housebuilding sector for me right now.
Persimmon shares are on the post-election ride too, up 9.2%. So far in 2019, both stocks have gained a similar amount, with Persimmon up 42% and Taylor Wimpey up 43%. Persimmon’s valuation looks similarly attractive, with a P/E of 10.5 and an 8.3% dividend yield.
As well as pressure from no-deal Brexit fears, Persimmon has also been dealing with customer satisfaction problems. In its November Q3 update, the firm said its “top priority is the delivery of higher levels of quality and customer service through the implementation of its detailed customer care improvement plan,” and it’s been putting the pursuit of sales growth on hold while it addresses that problem.
Volumes in the first half were, as a result, 6% down on last year, but Persimmon also said it has achieved “the Four Star status level in the latest quarterly HBF customer satisfaction survey results and we are currently trending strongly ahead of the Four Star threshold.”
Persimmon also told us that “consumer confidence has remained resilient despite the continued uncertainties around the timing and nature of the UK’s withdrawal from the EU.“
I think we could be in for a great 2020 for housebuilders.