As UK politics plumbs new depths, the unflappable British public continues to put its faith in bricks and mortar. This morning the Halifax house price index showed prices rising 1.8% in the past 12 months, which isn’t spectacular, but is as solid as anything in this country at the moment.
I wouldn’t invest in property via a buy-to-let, though. Being an amateur landlord is too taxing, and will get worse if Jeremy Corbyn’s Labour Party takes power. Why fill the Treasury’s coffers when you can buy housebuilding stocks tax-free inside a Stocks and Shares ISA?
FTSE 100 housebuilder Berkeley Group (LSE: BKG) is up almost 2.5% after setting itself a healthy annual pre-tax profit target of £500m-£700m a year, or £3.3bn in total over the six years to 30 April 2025.
This is particularly encouraging given that the group operates principally in London and the South East, where prices have been slowing faster than the rest of the country. Berkeley is keeping the faith with London, even while rivals have backed away, and is reaping the rewards, reporting that “pricing has remained stable and the group’s forward sales position remains above £1.8bn”.
It is approaching today’s market with caution, and is keen to maintain half-year cash levels close to the full-year position of £975m, subject to share buy-backs and investment in new land.
Like many housebuilders, Berkeley is an attractive dividend stock, with a current forecast yield of 5.4%, covered 1.6 times by earnings. It has returned £139.2m to shareholders over the six months to 30 September, including share buybacks, and plans to share a similar-sized pot over the next six months.
Berkeley isn’t your average housebuilder, it tends to to take on more complex projects, but it’s longer-term focus may see it through difficult times like today. A lot will depend on Brexit, but trading at 11.7 times forward earnings, it looks difficult to resist, and a downturn could be the right time to buy it.
The UK’s largest housebuilder Barratt Developments (LSE: BDEV) took a major Brexit hit but it has fought back, its share price rising 12% over the last year. It is up 65% over five years, 10 times the return across the FTSE 100 as a whole.
Earlier this week, it posted a 9% increase in annual profit before tax to £909.8m, but did warn that volume growth would be at the lower end.
Improved operating margins have offset lower sales prices, allowing Barratt to increase its final dividend from 17.9p per share to 19.5p, with a special payment lifting the total 6% to 46.4p. The forecast yield is now a generous 7.5%, with cover of 1.6.
Analysts at Shore Capital recently warned that the Barratt share price has been overbought following an overly bullish July update. You may beg to differ with the stock trading at 8.8 times forward earnings, although the PEG signals less of a bargain, standing at 1.2.
So much depends on Brexit. The scaling back of the Help to Buy scheme from 2021 is another long-term challenge. That aside, housebuilders will continue to be underpinned by low interest rates and a hugely competitive mortgage market.
Harvey Jones has no position in any of the 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.