This time last year, the share prices of the UK’s largest home-builders were riding high as they struggled to keep up with the demand in a chronically-undersupplied UK housing market. However 12 months on, sentiment towards this sector has changed drastically.
Change of sentiment
Investors have soured on the home-building industry and started to dump their shares in companies such as Taylor Wimpey (LSE: TW) and Barratt Developments (LSE: BDEV). These two FTSE 100 home-builders have seen the value of their shares fall by around a quarter, excluding dividends, over the past year. And it doesn’t look as if the selling is going to let up any time soon.
Despite the recent turbulence, there’s no denying that these two companies have produced tremendous returns over the past 10 years. A double tailwind of rising home prices and easy access to financing for buyers, through the government’s Help To Buy scheme, has sent profits surging. And the shares have followed suit. Including dividends, over the past decade, a £1,000 investment in Taylor has grown into £17,600, while Barratt has turned £1,000 into £13,600.
What has spooked the market?
Investors have been concerned about the state of the UK housing market for some time. Even though the UK is short on houses, rising construction costs, interest rates, and the overall level of consumer debt in the economy are all threats to demand growth. What’s more, back in April, the average UK house price hit a record of just under £227,871, making affordability is an issue as well.
These concerns were crystallised earlier this week when Crest Nicholson issued a profit warning, citing a slowdown in sales, particularly for “aspirational” homes in the Home Counties worth £800,000 or more. Management now expects profits for the full year to fall short of the £204m expected by the City. A range of between £170m and £190m is more likely, according to the firm.
Still at this point, it’s unlikely Barrett and Taylor are feeling the same heat. The bulk of their home sales are at the lower end of the price scale, which means they’re still eligible for the government’s Help to Buy scheme. That said, Crest’s warning has done little to reassure the market. Cracks are starting to appear in the UK property bull market, and investors don’t like it at all.
The bottom line
So, should you buy Taylor and Barrett after recent declines?
I think the answer to this question is yes. Both of these companies are well-funded with cash-rich balance sheets, and demand for homes at the affordable end of the market shows no sign of slowing down. There’s even been chatter that the government will extend its controversial Help to Buy scheme to encourage yet more building.
As well as these positive factors, both companies are currently trading at bargain-bin valuations, which are highly attractive in my view, and offer a wide margin of safety. Barrett trades at a forward P/E of 7.4 and yields 8.6, while Taylor trades at a P/E of 7.2 and yields 11%.
Considering all of the above, I rate these two stocks a ‘buy’ after recent declines.
Rupert Hargreaves owns no share 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.