3 reasons to be bullish on housebuilders Taylor Wimpey plc, Persimmon plc and Berkeley Group Holdings plc

Shares in housebuilders traded flat for much of the past year, held back by uncertainty created by Brexit fears and concerns of a slowdown in the property market. The cyclical nature of the sector means investors will always worry about the next downturn. But, while there are headwinds, I don’t think we’ve reached the peak for the housing market.

Here are three compelling reasons why I’m optimistic on the shares of major housebuilders.

1. Housing shortage

House prices may be rising at their slowest annual rate since the end of the recession, but the long-term fundamentals remain firmly intact. Chronically low levels of housing supply and high demand support further growth in house prices and rising profitability for the housebuilding sector.

And while the number of new houses being built has been steadily growing over recent years, they remain well below pre-recession levels. In the fourth quarter of 2015, housing starts in England increased by 6% on a quarter-on-quarter basis, to a seasonally adjusted figure of 37,080. But that’s almost a quarter less than the 2007 figure of 49,970.

There are also widening regional differences in house prices, due to worsening supply shortages in high-demand areas of the south east and London. The imbalance between supply and demand in different regions means that while overall sector growth is slowing, there are plenty of opportunities for property developers in those high-demand regions.

2. Double-digit earnings growth

Taylor Wimpey (LSE: TW), the largest housebuilder by market cap, appears to be benefitting hugely from rising property prices, with earnings continuing to grow quickly. Home completions grew 7.5% in 2015, but as average selling prices rose 8% to £230,000, operating profit margins also gained 2.4 percentage points to 20.3%. This meant that, despite a modest rise in home completions, underlying profits grew a whopping 34%, to £604m.

Widening margins and double-digit earnings growth are common themes in the sector. Persimmon (LSE: PSN) saw underlying pre-tax profits grow by 34% to £638m, as margins increased 3.5 percentage points to 21.9%. London-focused developer Berkeley Group (LSE: BKG) saw a more modest improvement in margins of 1.4 percentage points, as its margins are already significantly higher than its peers, at 23.1%. However, pre-profits grew by a more impressive rate of 42%, to £540m, as the company focused on completing higher value London apartments.

3. Valuations

Low valuation multiples indicate there may be further growth in the shares of these housebuilders.

  P/E (2015) Forward P/E (2016) Forecast Dividend Yield (2016)
Taylor Wimpey 13.6 10.2 6.2%
Persimmon 11.7 10.3 5.8%
Berkeley Group 9.6 7.8 6.9%

I’m particularly attracted to Taylor Wimpey and Berkeley Group. Taylor Wimpey has bounced back more strongly since the recession, and the company has excellent cash flow generation. It’s expected to pay shareholders another bumper special dividend this year, with a total dividend forecast for 2016 of 10.9p per share, which gives it a very tempting prospective dividend yield of 6.2%. Analysts highly rate the stock too, with eight out of 13 analysts recommending the stock as a “strong buy”.

Berkeley Group is interesting for its near-term growth prospects. The housebuilder has a number of major projects nearing completion, and the company expects to deliver pre-tax profits in the region of £2bn over the next three years. What’s more, Berkeley has recently added six high-value London sites to its land bank, which partly allays fears that the company’s growth would soon slow once existing projects have been completed.

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Jack Tang has a position Taylor Wimpey plc. The Motley Fool UK has recommended Berkeley Group Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.