Property stocks have been among the worst hit sectors since the stock market crash began a few months ago. The outbreak of Covid-19 and its subsequent impact on share prices has caused many UK property stocks inside the FTSE 100 to trade on dirt-cheap valuations.
There’s good reason for this. The global pandemic has significantly disrupted the property market, which is bad news for those investing in both buy-to-let property and property stocks.
That said, I think now is an ideal time to buy cheap UK property stocks. Here’s why:
End in sight
Yesterday, leading British housebuilder Taylor Wimpey (LSE: TW) confirmed that it would commence a phased return to construction in May. The announcement came as the company reported rising orders for new homes.
As a result, shares in the company rose by 6% in early trading. But, don’t feel as though you’re too late to the trend as the share price still sits 36% down overall since mid-February highs.
What’s more, the company’s price-to-earnings ratio of 6.6 suggests to me there’s significant value to be had.
A steady return to business isn’t just music to the ears for Taylor Wimpey, Persimmon, and other UK housebuilders. It’s good news for other companies connected to the sector, such as online property site Rightmove.
Stable financial position
UK housebuilders undoubtedly face difficulties ahead. The impact of job losses in the economy, combined with the fears of a prolonged recession, cast uncertainty over the property market.
In a worst-case scenario, prices could fall as demand for new homes dries up. This in turn disincentivises housebuilders to increase output until prices recover. Even if it comes to this, I think Taylor Wimpey remains in a strong position to weather the storm.
In light of current circumstances, the company has implemented cash preserving measures to sustain vital levels of liquidity. The group announced a suspension of all dividend payments, which will provide a substantial amount of cash to help keep the company going.
Many have a pessimistic outlook for the UK property market, but I’m bullish when it comes to the recovery of cheap UK property stocks such as Taylor Wimpey. There’s evidence to support my view.
For example, demand for new houses being built by Taylor Wimpey has increased over the last few months by more than 200 units. Additionally, prices for these homes are said to be comparable to those achieved prior to the lockdown restrictions.
In fact, since closing its sites and offices, cancellations have only affected 0.8% of the group’s order book.
On top of this, I’m confident about the favourable long-term outlook for the property market in the UK. Interest rates are at historic lows and many point to the fact that the country faces a housing shortage.
For this reason, I expect companies like Taylor Wimpey to have a smooth recovery. What’s more, the group’s bright growth prospects in current market conditions look healthy to me.
I can’t speak with the same confidence for buy-to-let though. The illiquid nature of physical property and the time-consuming effort of being a landlord puts me off investing.
Instead, I’d buy shares in cheap UK property companies in the confidence that a steady return to business and pre-crisis levels consumer spending could result in these stocks delivering attractive returns to investors.
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Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK has recommended Rightmove. 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.