The UK housing market continues to hold steady despite the growing crisis over Brexit. That’s impressive, given that the housebuilding sector was hit hardest by the shock 2016 EU referendum result. However, I don’t think buy-to-let is the way to play property.
Buy-to-let bother
The Treasury’s tax crackdown combined with tough new regulations on renting out properties makes it more of a faff than ever. As things now stand, I reckon the buy-to-let dream is dead.
Personally, I would rather gain exposure by investing directly in housebuilding stocks. You can buy and sell them in seconds, instead of months, and take all your returns entirely free of tax inside an ISA. Also, you can invest much smaller sums.
That’s not to say housebuilders have given investors an easy ride. For example, FTSE 100-listed Taylor Wimpey (LSE: TW) trades 18% lower than three years ago, even though it has rallied 20% in the last six months.
Telford time
London-focused residential property developer Telford Homes (LSE: TEF) has just reported its full-year results to 31 March and is down 4% despite posting a 12% jump in total revenue to £354.3m.
It has made a “strategic shift towards build to rent developments,” which are less risky and capital intensive, but also have lower margins. This reduced total profit before tax to £40.1m, down from £46m in 2018.
Build and they will rent
Telford has entered into strategic build-to-rent partnerships with Invesco and M&G Real Estate to speed growth in the sector and expects to develop significant pipelines in the coming years. It currently has a development pipeline of 4,900 homes, up from 4,000 last year, with a total gross development value of £1.59bn, up from £1.31bn.
Today, the £220m group proposed a final dividend of 8.5p per share, with the total dividend matching last year’s at 17p. The forecast yield is juicy at 5.6%, with cover of 1.9. Gearing has been cut from 52.5% to 37%.
With City analysts forecasting a 28% drop in earnings over the next 12 months, I’d advise caution. But the current valuation of 10.6 times earnings is certainly tempting.
Taylor-made
With a market-cap of £5.5bn, Taylor Wimpey is a much larger beast. It’s trading at an even lower valuation of just 8.5 times forward earnings, which reflects concerns about the sector. One worry is the future of the Help to Buy scheme, which underpinned more than half of all newbuild purchases in 2018 and, in some areas, as much as 97%.
Effectively, it’s a Government top-up for the housebuilders. But that ends in 2021 for all but first-time buyers, and altogether from 2023. Endless Brexit uncertainty will also add to investor worries.
Made to order
However, the Taylor Wimpey stock is on the up as the company made a strong start to its new financial year, with strong sales and a healthy order book, which currently stands at £2.40bn, up from £2.16bn in 2018.
The group currently has a forecast yield of a mind-boggling 10.7%, although cover is thin at 1.2. Years of double-digit earnings growth looks set to slow, but they should still climb 2% in 2020.
Housebuilding stocks are risky as UK politics enters unknown territory. But with today’s yields and valuations, I’d pick them over buy-to-let every time.
