The June 24 Brexit decision sent a shockwave through housing stocks in London, with some dropping in value by as much as 40% in early trading. However, it’s now clear that the market overacted to the outcome of the Brexit vote. Shares in leading home builders Barratt Developments (LSE: BDEV) and Taylor Wimpey (LSE: TW) have erased around half of their post-Brexit losses and so far, there’s been little impact on these companies’ underlying businesses during the past few months.
Still, when it comes to forecasting how Barrett and Taylor Wimpey will perform over the next few years as Brexit unfolds, analysts are split.
Analysts are split
There’s already some evidence that the UK’s housing market is slowing. Average house prices rose by 0.3% during September, following a 0.6% increase in August. The lower September figure dragged down the annual pace of growth from 5.6% to 5.3%.
Meanwhile, data from the Bank of England released last month revealed mortgage approval numbers fell to a little more than 60,000 loans in August — the lowest level in two years.
Nonetheless, demand for housing in the UK is unlikely to disappear anytime soon. It is estimated the country needs 250,000 new homes every year to meet new build demand. Meanwhile, a report out today from the Royal Institution of Chartered Surveyors warns that the country needs another 1.8m rental homes on the market to meet upcoming demand.
These figures show that no matter what happens before, during or after Brexit, the UK needs millions more homes over the next few years, which means that Barratt, Taylor Wimpeyand their peers will have their work cut out for them. And for this reason, even after recent gains, these two stocks could still be attractive long-term investments.
Survivors
Barratt and Taylor are two of the UK’s largest and most experienced homebuilders. The two firms survived the 2008 housing crash and know what it takes to survive a housing market downturn. Indeed, the downturn is still relatively fresh in the minds of both companies’ managements, and they will want to avoid repeating the darkest days of 2008 again at any cost.
Part of the plan to prevent a repeat of 2008/09 has been the decision by both companies to maintain a substantial cash balance. At the end of June 2016 Barratt reported a net cash balance of around £500m, whilst at the end of 2015 Taylor Wimpey reported net cash of around £200m — two sizable cash cushions that give these companies flexibility to manage any housing market downturn.
So, are Barrett and Taylor Wimpey still cheap after recent gains? Well, Brexit is unlikely to reduce the demand for new homes in the UK. As two of the UK’s largest homebuilders, it’s clear Barrett and Taylor Wimpey will continue to profit from the demand for new homes in the UK for the foreseeable future. Current valuations are also attractive. At the time of writing shares in Taylor Wimpey trade at a forward P/E of 9 and support a dividend yield of 7.3% while shares in Barratt support a yield of 7% and trade at a forward P/E of 9.3.
