Those who think the UK’s big housebuilders are in for a tough time had a further reason to fear on Thursday, as the Royal Institute of Chartered Surveyors (RICS) released predictions of falling house sales over the next three months.
Houses being put on the market are taking longer to sell too, with the average currently around four months. People, as they tend to do in tough economic conditions and in times of uncertainty, are putting off plans for moving house and are hunkering down.
Despite that, RICS still expects house prices to rise by around 1% in 2019.
Chain
The feared chain of events for shares in housebuilders is clear, as slowing sales at the estate agents would inevitably lead to weakening demand for newly-constructed homes. And that, in turn, should lead to lower profits for the companies building them.
Roland Head pointed out the risks when he looked at Barratt Developments (LSE: BDEV) recently, and you know what? I agree that the risk of downward pressure on the market for new homes is real.
But unlike the multitude of investors who have sold Barratt shares and turned their backs on the housebuilding sector, I think times of pessimism are times to buy — and I recently made a small investment in Persimmon myself. Here’s why I’m not worried about these latest fears…
Overreaction
My experience is that investors always overreact to market news, whether the news is good or bad. When an industry is doing well and share prices are rising, they tend to be pushed up to overvaluation. It’s arguable that this happened at the recent peak for Barratt and its peers, and that the strong earnings gains over the past five years or so produced unreasonable expectations.
Barratt shares reached a P/E of around 14 in 2015, and while that’s pretty much bang on the FTSE 100‘s long-term average, it is a cyclical business and cyclical businesses typically (and correctly, in my view) command lower valuations.
So yes, Barratt shares might well have been overvalued at their peak. But similarly, I see them as undervalued now they’ve given up so much.
What we’re looking at is shares on a forward P/E of under seven based on forecasts for the year ending June 2019, after a 30% fall in the Barratt share price so far in 2018. Even if dividend yields were not as high as the forecast 9.7% right now, I’d probably still consider that as undervalued.
Dividend
Is the expected dividend likely to be met? It would be comfortably covered by forecast earnings, and the company has plenty of spare cash it’s returning to shareholders too, so I think that’s a yes.
Anyway, finally, back to the answer to my question of what Brexit will really do to the Barratt share price…
I think it’s going to leave it rocky and uncertain for at least the next 12 months, so if you’re concerned about short-term volatility then maybe you should stay away — that’s up to you.
But for me, I see a solid long-term income stock being sold at bargain prices, and I think the bargain will continue for much of 2019 — and that will hopefully give regular savers time to decide whether to buy.
