The pandemic has devastated the UK housing market. In fact, the current economic slump has resulted in both a fall in house prices and the volume of housing sales. But in many respects, the housing market is starting to look up.
Firstly, Rishi Sunak’s stamp duty changes have given many people an incentive to buy, and this should boost demand. There is also a housing shortage within the UK, and both major political parties have building more homes on their agendas. As a result, I can see a recovery on the cards for housebuilding stocks. In particular, I believe that Vistry (LSE: VTY) is significantly undervalued.
Recent trading update
Vistry’s recent trading update did indicate that the pandemic has severely affect the firm. For example, revenues from housebuilding activities in the six-month period ending June 30 totalled £344m, in comparison to £854m in the same period last year. Completions were also down from 3,371 to 1,235. But while this is a big dip for revenue, a recovery does seem imminent.
For example, in the last four weeks, the firm’s sales rate increased to 0.62, which actually beats last year’s figure of 0.58. The sales rate measures the number of private house sales per site per week. Across the business, Vistry’s sites were also running at around 90% of pre-Covid efficiency. Both of these facts demonstrate the extent to which business has started to pick up recently for the company. As a result, with the housebuilding stock down over 50% on the year, it currently looks oversold to me.
Net debt has recently been reduced to £355m from £476m. This was ahead of expectations and puts the housebuilding stock in a strong financial position. The group also has committed banking facilities which total £770m, and access to the Covid Corporate Financing Facility if needed.
With profits likely to be hit throughout the year, such a strong balance sheet is essential for the company. Vistry’s attempts to ensure a strong financial situation therefore give me hope that it will be able to ride out the crisis. As a result, I’d certainly buy Vistry stock today!
There are other housebuilding stocks…
I’m actually quite bullish on the housing sector in general, especially following the news of stamp duty changes. While Vistry is the housebuilding stock I think is most undervalued, Barratt Developments (LSE: BDEV) is the other one I’d keep my eye on.
Once again, the trading update for Barratt did see a large decrease in production, with house completions dropping from 17,856 in 2019 to 12,604. But the company has seen “high customer interest levels since sales centres reopened”. The forward order book also stands at £3.2bn, which is actually larger than 12 months ago. I can therefore see a bright future for the housebuilder.
Like Vistry, Barratt is also in a strong financial situation to ride out the crisis. This includes cash of £350m, meaning that the firm will now be able to “repay all furlough funds received”.
As such, I believe that both these housebuilding stocks can offer massive returns for investors. I already own both these stocks, and at their current low prices, I’m tempted to buy more.
Stuart Blair owns shares in Vistry and Barratt Developments. 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.