Stocks to buy in the housebuilding sector

Dr James Fox explores stocks to buy in the housebuilding sector as higher interest rates and inflation put companies under increasing stress.

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I’m always on the lookout for stocks to buy to enhance my portfolio. But I haven’t looked at the housing sector for some time.

I actually have substantial exposure to the sector already. However, that hasn’t been good for me. Sizeable dividend payments have not made up for falling share prices.

In general, the inflationary environment and higher interest rates have not been good for housebuilders. Inflation pushes up building costs while higher interest rates reduce demand for homes.

However, there is some evidence to suggest that the sector is fairing better than expected. Liberum recently pointed towards “surprisingly” strong demand and falling mortgage rates.

The investment bank added that this was a positive sign for the sector moving towards the traditionally stronger warmer months.

However, there is also some negative data including falling house prices, and a profit warning from Persimmon — a sector leader.

So, with the above in mind, I’m going to take a closer look at two of the most attractive housebuilders in the UK.

Vistry Group

Vistry Group (LSE:VTY) is among the cheapest housebuilders according to its forecast price-to-earnings — around 5.5. Pre-tax profits are expected to have risen 21% in 2022, to approximately £418m, up from £346m a year previous.

However, the big challenge is 2023. Affordable housing is a key segment for Vistry, and demand could be more resilient here. As such, investors will be looking to the partnerships side of the business to help the firm deliver above average returns.

Vistry is another stock where a premium should be re-established to the sector. Partnerships should prove its resilience and premium growth in 2023, helping Vistry’s returns hold up much better than peers“, Liberum recently noted.

The dividend yield currently sits at a very attractive 7.8%.

Bellway

Bellway (LSE:BWY) recently reported a “robust first half performance“, with record completions of 5,695 homes and a 1.6% increase in average selling prices to £316,900.

However, once again, it’s 2023 that is worrying investors. Bellway said overall reservation rates had reduced by 31.7% to 138 per week. And private reservation fell 43.8% to 91 per week.

The company highlighted that weaker private demand, due to higher mortgage rates and an end to the help-to-buy scheme were partially offset by the company’s programme of accelerating social homes construction.

Liberum, in a recent update on the housing sector, said it liked Bellway’s strong balance sheet, relative valuation, strong operational management team, and balanced portfolio.

Cautious optimism

Naturally, it pays to be cautious in this sector. Further rises in interest rates could really hurt demand and overall house prices. But these two firms offer some degree of insulation from the private market due to their affordable housing operations.

The government’s affordable homes plan could miss production targets by a sizeable 32,000 homes. In theory, this could be more safe business for these two housebuilders.

I already own Vistry but I’m looking to buy more, while also adding Bellway to my portfolio.

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.

James Fox has positions in Persimmon Plc and Vistry Group Plc. The Motley Fool UK has no 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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