The prospects for the housebuilding sector appear to be positive. Low interest rates have meant that demand for housing across the UK and Europe has remained robust, and this situation could continue over the medium term.
As such, now could be the right time to buy housebuilders. With population growth expected to remain high and there being a relatively constrained amount of new supply, these two stocks could be worth buying at the present time.
Improving performance
Reporting on Tuesday was Irish housebuilder Cairn Homes (LSE: CRN). The company’s performance in 2017 was relatively upbeat, with it completing 418 unit sales at an average selling price of €315,000. This is considerably higher than the previous year, where 105 units were completed at an average selling price of €295,000.
Higher pricing and volume contributed to a rise in revenue of 3.7 times. This helped to push the company’s operating profit up from €3.6m in 2016 to €15m in 2017. Further growth could be ahead, with the business active on 11 developments which are expected to deliver in excess of 3,650 new homes in total.
Looking ahead, Cairn is forecast to post a rise in its bottom line of 85% in the next financial year. This puts it on a price-to-earnings growth (PEG) ratio of just 0.2, which suggests that it could offer significant upside potential. Although there is the prospect of a tightening monetary policy across the Eurozone over the coming years, this is likely to take place at a slow pace and could mean that demand for new homes remains far higher than current levels of supply.
With Cairn due to commence dividend payments in the next financial year, it could offer significant dividend growth potential in the long run.
Total return potential
Also offering the prospect of high capital growth in the long run is UK housebuilder Bellway (LSE: BWY). It appears to offer a solid balance sheet which could help it to perform well in various trading conditions. And with it having a price-to-earnings (P/E) ratio of just 7, it appears to offer a wide margin of safety.
Certainly, there are risks to the future prospects of housebuilders. This week the government announced plans to tighten up the planning process, with a ‘use it or lose it’ standpoint set to be adopted regarding planning permission. The aim of this to increase the number of houses being built, as well as prevent builders from accumulating large land banks.
However, the fundamentals of the market remain solid. High demand backed by government policies such as stamp duty relief for first-time buyers and the Help to Buy scheme mean that current supply levels are likely to fall significantly short of those required.
As such, Bellway and its sector peers could enjoy positive trading conditions from which to generate rising levels of profitability. This situation looks set to continue and may lead to a significant rise in the company’s share price in future years. As a result, its dividend yield of 4.5%, covered three times by profit, could hold significant appeal.
