The UK housing market appears to have a positive future. There is a fundamental lack of supply versus demand, and this situation does not appear likely to change even in the long run. Despite promises of increased housebuilding by various governments, there has been greater population growth than the number of houses built for many years.
As such, and with population forecasts still well ahead of house completions, now could be the perfect time to buy into the sector via these two companies.
Reporting on Tuesday was leading housebuilder in Scotland Springfield Properties (LSE: SPR). The company’s trading in the first six months of the year has been positive in both its private and affordable divisions. It has been underpinned by the continued need for more homes for private individuals across all tenures in the affordable and social housing sector. As such, its revenue for the period has been in line with expectations.
Despite favourable supply and demand conditions, the company’s valuation remains low. It trades on a price-to-earnings (P/E) ratio of 12.7 and yet is forecast to record a rise in its bottom line of 23% next year. This suggests that it is grossly undervalued at the present time and could be due for a major upward re-rating over the medium term.
Clearly, the housebuilding sector is highly politicised. Government policy can have a huge impact on the trading conditions for companies such as Springfield Properties. However, the UK is less than one year into the current Parliament, and the government seems intent on stimulating the industry through policies such as Help to Buy. Therefore, over the next few years it would be unsurprising for profitability across the industry to keep moving higher.
Also offering upside potential within the housebuilding sector is Bovis (LSE: BVS). The company has experienced a difficult period in recent years, with the quality of its homes being below the required standard according to a range of customers. This has caused provisions to be large and it has negatively impacted upon the company’s financial performance. In fact, in the current year the company is forecast to see its earnings fall by 19% following last year’s 8% decline.
Under a new management team though, Bovis is intent on delivering a successful turnaround. It is seeking to improve the quality of its new homes in order to boost its customer satisfaction rating. While there is still a long way to go on this front, the company seems to be making good progress. It is due to report a rise in earnings of 25% in the current year, which puts it on a forward P/E ratio of just 12.5.
This suggests that there could be upside potential on offer. While possibly one of the riskier housebuilders due to its poor past performance, Bovis also seems to offer high potential rewards.
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Peter Stephens has no position in any shares mentioned. 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.