Shares in UK housebuilders have been struggling recently. High inventory levels combined with affordability issues have been weighing on the industry.
One of the worst-affected has been Vistry (LSE:VTY), which is down 47.59% in the last 12 months. But the firm might have a huge opportunity ahead.
Company overview
Unlike other UK builders, Vistry builds houses for institutional partners. These include housing associations, local authorities, and the private rental sector.
In theory, there are two big advantages to this. The first is that it doesn’t have to finance the build itself, which makes it more capital efficient.
The second is that a lot of its houses are sold before they’re built. This reduces the firm’s exposure to the ups and downs of the housing market.
On the other side of the coin, there are drawbacks. Selling to partners typically means lower margins – that’s the trade-off for financing and certainty.
There’s also a risk of complexity. External partners rely on funding and delays to this can create working capital challenges for Vistry.
The partnership model has pros and cons. But right now, it means the company could be looking at a huge opportunity.
SAHP
The UK government is committed to building around 300,000 new homes a year. A big part of this is the Social and Affordable Homes Programme (SAHP).
This offers £39bn in funding for new homes that meet certain affordability criteria. And it’s a big deal for Vistry in two ways.
First, the company is one of two organisations that has Strategic Partner Plus status. That means it can bid directly for up to £700m in funding.
Second, the main bidders are likely to be housing associations and local authorities. But these are exactly the organisations Vistry already partners with.
These existing relationships give the company a huge advantage over competitors. And this hasn’t gone unnoticed by its competitors.
In the context of a firm with a £1.25bn enterprise value, the opportunity could be huge. The stock market, however, appears to be focused on other issues.
Why is the stock down?
Housebuilders have been offering discounts to shift inventory in a weak market. And that includes Vistry as it winds down its open market division.
This is never a good thing. But it’s more of a problem for the company than some of its rivals.
Vistry carries more debt than most housebuilders. That’s a feature of its partner-focused model, which means it needs less cash to operate.
It means, however, that the firm can find itself needing to raise cash more urgently. And that’s why it’s been discounting more aggressively.
The stock market – rightly – isn’t impressed with this. But I think the company is at a major turning point.
Vistry plans to focus on SAHP projects from H2 onwards. And when it does, I expect things to change dramatically.
Hard to resist
At £3.36, I think the share price is hard to resist. I own the stock in my ISA, but another £1,000 for 297 shares won’t ruin my diversification.
It’s one I’m looking very carefully at right now. And I’m expecting to add to my investment before the second half of the year.
