My earlier fears that the coronavirus crisis might cause property prices to fall were misplaced. Instead, selling prices have been moving higher for domestic property in many areas of the market.
Why I’d invest in property shares
When lockdowns first began to ease, Rightmove reported an upsurge in activity because of pent-up demand. And the easing of Stamp Duty tax builds on that effect. Indeed, both selling and rental prices are buoyant in many places.
Meanwhile, shares in the housebuilder and property sectors remain depressed in some cases because of the coronavirus-induced stock market crash. Maybe there’s an opportunity to pick up some stock bargains based around the theme of property.
One obvious share to research is Rightmove itself, which stands to gain from activity in the property market. And at 575p, the share price is still around 18% below its level in February before coronavirus hit the stock market. Meanwhile, City analysts have pencilled in a chunky rebound in earnings for next year. If achieved, the business would equal its performance in 2019.
However, the stock is prized by investors and carries a forward-looking earnings multiple close to 30. But I think it’s earned that high rating. The company commands a powerful niche and benefits from much of the activity in the housing market. The record of trading shows impressive growth in revenue, earnings, cash flow and shareholder dividends over a multi-year period.
Lagging cash flows and discounting
But in June, the company warned that despite the positive consumer reaction to the re-opening of the housing market things are still difficult in the sector. It takes around three months for housing transactions to complete “which impacts the cash flows of our agents.” On top of that, Rightmove reckons it takes agents time to build a pipeline of vendors and new sales instructions.
To address those challenges, the company has been offering its agency customers discounts between 40% and 75%. And the financial impact of this extended support over August and September will reduce revenue by between £17m and £20m. That will be on top of a £65m to £75m revenue reduction because of discounts offered between April and July.
To put those figures in perspective, Rightmove achieved revenue of around £289m in 2019. And that suggests a reduction this year of as much as around 33% based on the discounts announced so far. However, although Covid-19 has caused weaker trading during 2020, don’t forget those City analysts reckon Rightmove’s business will recover during 2021. And I reckon the mini-boom in the housing market now is encouraging.
If you don’t have the stomach for Rightmove’s rich-looking valuation, I reckon there’s some good value in the housebuilding sector. A strong housing market may benefit those firms building and developing property too. And I’d consider researching names such as Persimmon, Redrow, Taylor Wimpey, Vistry, McCarthy & Stone and others.
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Kevin Godbold owns shares in Redrow and Vistry. The Motley Fool UK has recommended Redrow and 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.