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Why I back this FTSE 100 stock to help you benefit from strong demand for UK housing

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Models of houses on top of pound coins
Image source: Getty Images.

In the build-up to the Brexit referendum of 2016, one of the key concerns outlined by proponents of the European Union was the impact that a so-called hard Brexit would have on the UK property market.

The Bank of England’s governor Mark Carney himself noted that house prices could fall by as much as 30% in the event of a ‘disorderly’ departure.

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However, post-Brexit jitters in the UK housing market appears to be fading.

With UK employment levels at record levels, highly attractive mortgage rates ever-present, and ongoing Help to Buy schemes further amplifying demand, the outlook looks somewhat optimistic.

In fact, while it remains to be seen how the UK’s eventual European exit will unfold, I would argue that now is the time to back British housebuilding company Persimmon (LSE: PSN).

Persimmon recovers from overnight Brexit blues

In order to set the scene, it is important to remember that in the wake of the Brexit result being announced, shares in Persimmon dropped in excess of 35% in just a few days. Based on the price at the time of writing -1,950p – the British housebuilder has since seen its shares increase by almost 50%.

With momentum now clearly in Persimmon’s favour, I strongly believe that the company’s all-time high of 2,880p is now firmly within sight.

But why?

First-time buyers are crucial

Well, first and foremost, first-time buyers in the UK currently have access to good mortgage availability. Recent Bank of England data showed that net mortgage lending grew to £4.3 billion in April, up from the somewhat sluggish £3.8 billion average seen in the prior six months.

First-time buyers are further incentivised to get on the property ladder while Bank of England rates are still at sub-1% levels.

This is especially relevant to Persimmon, not least because more than half of the private homes it sold in the first six months of 2019 were attributable to this particular demographic of the housing market.

Foundations in place to deal with a potential drop in demand

On the other hand, it is also important to recognise that the Help to Buy scheme will cease to exist in 2023 – something that Persimmon’s current business model has such a strong reliance on.

As such, this is something that investors need to keep an eye on, especially with regards to how the housebuilder plans to deal with a potential decrease in demand.

However, Persimmon has a balance sheet that looks to be in a much healthier state than it was post-2008. Not only is the company in possession of good net cashflow levels, but debt is on the decline.

For the icing on the cake, I must point you towards the highly juicy 12.16% dividend yield that Persimmon recently paid. While I appreciate that it remains to be seen how much longer the company can facilitate such a lucrative offering – especially when one considers the ever-present uncertainties of Brexit – I for one see no reason for concern, at least in the short term.

All in all, I believe that at its current price, investors can still back Persimmon at a highly attractive discount.

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Neither Kane nor The Motley Fool UK have a position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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