Are UK housing stocks too cheap to ignore?
Today's update from housebuilder Inland Homes(LSE: INL) shows that the UK property market has delivered robust performance in the months since the EU referendum. However, Inland Homes says it's too soon to tell what impact Brexit will have on the housing market over a longer timescale. Therefore, should you avoid it, or focus on the low valuations that are on offer throughout the sector for now?
It looks like the answer might be yes... for those with a long-term outlook. Inland Homes said today that house sales have continued at a normal rate after the EU referendum, particularly at Inland's price point and geographic focus. Its forward sales remain strong, totalling £22.5m versus £31.1m at the same time last year. Furthermore, Inland has decided to increase its dividend by 29% to 0.9p per share. This puts it on a yield of 2%, although with dividends being covered over three times by profit there's scope for shareholder payouts to rise rapidly over the medium-to-long term.
The UK housing market is in the middle of its most uncertain period since the credit crunch. The Bank of England has stated that UK GDP growth will fall in 2017 and unemployment will rise. Both of these factors would be bad news for UK house prices and for new housing demand.
However, Inland states in today's update that the fundamentals of the housing market remain strong in terms of demand for new homes exceeding supply. Due to a major imbalance in this respect, this situation is likely to remain in place for a number of years. Inland also states that government initiatives such as Help to Buy should mean that demand remains robust, although there's a chance that such initiatives could be changed by the new Chancellor.
Margins of safety
Valuations across the sector indicate that there are wide margins of safety on offer. This should limit downside risk and also create opportunities for upward re-ratings over the medium-to-long term. For example, Inland Homes trades on a price-to-earnings (P/E) ratio of 10, while sector peer Persimmon(LSE: PSN) has a P/E ratio of 9. Both of these figures indicate that the stocks have significant long-term appeal for value investors.
However, in the short run, both companies are due to report declining levels of profitability. In Inland Homes' case, its pre-tax profit is forecast to fall sharply from £34m to £16m in the current year. Likewise, Persimmon's earnings are expected to slump by 5% in 2017. Clearly, this guidance is likely to change since we simply don't know how Brexit negotiations will pan out over the next couple of years.
The key takeaway though, is that Inland Homes and Persimmon offer very low valuations that significantly reduce their risk to new investors. It's likely that there will be at least a degree of volatility in their share prices as the shakeout from Brexit gathers pace. However, for long-term investors they're logical buys that could deliver stunning returns.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Inland Homes. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.