Will London’s Sky-High Real Estate Prices Send Telford Homes Plc & Foxtons Group Plc Soaring?

Will some of the world’s priciest real estate be enough to save Foxtons Group Plc (LON: FOXT) & Telford Homes Plc (LON: TEF)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in London homebuilder Telford Homes (LSE: TEF) have risen 337% over the past five years on the back of the buoyant (some would say overheating) capital property market. Yet the shares look cheap at 9 times forward earnings with a whopping 3.9% yielding dividend on offer. Have City analysts missed a stellar small cap, or is there disaster on the way for Telford?

Focusing on non-prime London locations where prices are more reasonable, and thus more sustainable in the long term, has been a solid play for Telford. Through organic growth and acquisitions the company has built up a £1.5bn development pipeline with forward sales of £700m. Charging up to 20% of the price of a home in deposits and other fees means that the company has freed up significant cash flow years before developments are even completed.

A laser focus on costs has also brought gross margins up to 27.6%, above internal long-term goals and ahead of larger competitors. However, there are some clouds on the horizon. Net debt at the last reporting period was £50.4m, representing a gearing ratio of 37.3%. This is significantly more debt than larger homebuilders have piled on, having learned the lesson during the lean years that high leverage and low demand is a bad combination.

If London housing prices go south, gearing of 37% would be a scary sight for management and shareholders alike. I may be overly cautious, but high debt levels and relying on housing prices continuing to defy gravity makes me wary of Telford’s ability to continue performing as well as it has. While the company has built up a strong portfolio and relatively lean operations, housing prices will come down eventually and Telford is far too tied to them to make me consider investing in the homebuilder at this point in the cycle.

Multiple challenges

Foxtons (LSE: FOXT), the London-only estate agency, has struggled since going public in 2013 with share prices down 40% from their IPO level. While the company has continued to increase the top line, it’s increasingly beginning to feel the bite of a slowdown in its traditional high-end market.

Pre-tax margins fell from 32.1% to 30.7% over the past year as expensive home sales in central London fell, forcing the company to expand into outer London. Foxtons plans to continue with this and foresees expanding its number of locations from the current 62 offices to over 100 in the near future. Although this will help to keep the top line growing, I have concerns for what this will do to profits. Pre-tax profits already fell 2.6% year-on-year as the company discovered that lower home prices in non-core postcodes led to lower margins.

The largest worry I have for Foxtons is the long-term threat it faces from online-only and hybrid estate agents such as Purplebricks. These disruptive, low-overhead entrants to the industry offer sellers fees that are on average a quarter of what Foxtons and other high street agents charge. As increasing numbers of homeowners balk at paying 2.5% to 3% of their windfall to an agent who does little more than list the property on Rightmove and Zoopla, the traditional estate agency model could be facing an existential threat. With short and long-term problems looming, I don’t believe Foxtons shares will be reversing its decline anytime soon, even if the London property market continues to chug along.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »