If you think house prices are stabilising but you'd rather buy stocks than a 2-bed flat, here are three companies worth considering…
According to optimists, signs are emerging that the 'Great UK House Price Crash' is already over:
- The number of loans granted for UK house purchases rose 16% in April, according to the Council of Mortgage Lenders (CML).
- New buyer inquiries increased for the seventh month in a row in May, according to the Royal Institution of Chartered Surveyors.
- Halifax saw house prices rise 2.6% in May, while Nationwide reported prices up 1.2%.
- Estate agents sold more houses in April than in any month since October 2007, according to the National Association of Estate Agents.
Before you get too giddy, consider that the long housing crash of the 1990s saw several periods where price growth turned positive for a while before dropping again. Indeed, the CML said yesterday that mortgage lending fell back by 2% in May.
To my mind, imagining house price declines are over on the back of a couple of positive months is as plausible as discounting global warming because it was chilly enough in May for a sweater.
I think houses are still too expensive for first-time buyers, but I've been wrong about housing trends before. Investing in shares exposed to a housing market recovery (but ideally with moderate downside) could hedge my bets.
If you're more bullish on house prices, the following shares could be very attractive.
The estate agent
Savills (LSE: SVS)
Last year saw global estate agent and property advisor Savills post a £7.7m loss after taking £45m in writedowns. It halved its full year dividend to 9p, and took £22m in costs out of the business.
Selling country houses and New York apartments isn't getting any easier: Savills' interim statement in May warned conditions remained "very challenging". But its property management division actually grew last year, and the underlying business still looks healthy, writedowns aside.
Savills ended 2008 with net cash of £45m, and it has secured an £80m banking facility to 2011, which investors must hope will be used for bargain acquisitions rather than keeping the business afloat.
The company's activity is closely connected to the health of the financial services industry. There are some positive signs here, with bonuses back on the agenda and even talk of hiring.
Analysts are gloomier -- the consensus for 2009 earnings per share has dropped 2.5p in the past three months to 10.5p. Priced at 285p, that puts Savills on a darkest-before-the-dawn P/E of 27, and only just covers the 3% dividend yield.
The small cap property developer
Henry Boot (LSE: BHY)
A small cap multibagger that developed a loyal following in the boom years, Henry Boot shares have crashed with property prices.
Yet the developer and construction firm looks to be doing about as well as any in its sector.
The family-run company reported profits before tax of £19m in 2008; ignore a £22m impairment charge on its assets and trading profits were £44m. Sales were buoyed by unusually extensive land sales, but the construction business also traded profitably. The dividend for the year was held at 5p.
Emphasising the good cashflow, borrowings fell from £70m to £50m in 2008; still rather high for a company at £80 million, although management would doubtless point to a modest gearing figure of 26% on net assets of £190m. If you believe that asset valuation to be vaguely credible, then the company is priced at a decent discount.
According to an interim management statement for January to mid-May, Boot has kept on reducing debt and has also extended its banking facilities to 2012.
Management said the company was "trading profitably in line with market expectations". Further impairment charges are inevitable, though, and Boot says it's too early to call the bottom of the market.
At 67p, the shares yield 7.5%, assuming the 5p dividend can be held in the face of mothballed developments and looming rental voids.
Housebuilders are running down their landbanks at the moment, but Boot should profit when they start buying again. I've bought a few shares in this well-run company, but don't expect short-term miracles.
The mortgage lender
Lloyds Banking Group (LSE: LLOY)
With a few years hindsight, Lloyds might just be remembered as one of the cheapest shares in London.
The desperate situation last summer saw the Government waive aside competition concerns to allow for the creation of a new superbank when Lloyds merged with the stricken HBOS.
Lloyds shareholders have endured an appalling ride since then -- partly due to revelations about HBOS' duff lending book -- but at the operating level things have improved. Credit markets have thawed, bank margins are fattening as more rivals fail or withdraw from the market, and Lloyds' axing of its Cheltenham & Gloucester branch network is evidence of the synergies that the merger is unlocking.
Lloyds' residential lending now covers one third of the UK housing market -- and is one big bet on its recovery. The fly in the ointment is the legacy of HBOS' reportedly awful corporate lending, which could drag down profits even if housing recovers.
There's been much debate about Lloyds' valuation following the recent rights issue. Suffice to say that if you think house prices have gone as low as they'll go, the same is probably true of Lloyds shares.
More from Owain Bennallack:
Note: Owain owns shares in Henry Boot.
