SIF portfolio: Should I really buy another housebuilder?

Wednesday, Jul 11 2018 by
SIF portfolio Should I really buy another housebuilder

The portfolio’s sale of housebuilder Redrow appears to have been well timed. This stock has fallen by 20% this year and by another 5% since I ditched it from the SIF fund and my own holdings on 25 June.

Stagnating house prices and rising wage and materials costs suggest to me that margins and perhaps profits may have peaked for most housebuilders. And as John Kingham highlighted recently in his excellent UK Value Investor blog, the house price to earnings ratio is now at an all time high of 7.8 in England and Wales. Theoretically, houses are less affordable than they’ve ever been.

Of course, this headline figure is skewed by sky-high prices in London and by the (crazy) Help to Buy Scheme. But the underlying reality seems to be that more and more people can’t afford to buy houses. Can housebuilding stocks still deliver attractive returns?

Profit from rental demand?

One possibility is that the growing demand for rental property will continue to support the market for new-build homes. The increased involvement of institutional investors in this sector could mean that big housebuilders can secure contracts to build large numbers of houses. Such work could provide predictable cash flows and margins.

One housebuilder that appears to be focusing heavily on this sector is Bovis Homes. Much of the company’s recent Capital Markets Day presentation focused on affordable housing and the group’s partnerships with “registered providers”. These appear to be housing associations and residential developers active in the social housing market.

According to the company, the attractions of this business include “repeat and early business” and “drive down cost; increase efficiencies”. Land earmarked for projects of this kind now accounts for 27% of the group’s owned land bank.

Could I really buy Bovis?

I’ve been away for the last couple of weeks. While I’ve been gone, the results of my SIF screen have dwindled to just 11 companies. To my surprise, the top-ranked stock that’s eligible for the portfolio is Bovis. So this week I’m going to take a closer look at the numbers and outlook for this firm.

One of the headline attractions for income investors is a forecast yield of 9%. This figure includes planned special dividends, so it’s probably best to assume that the total payout could fall at some point. But this doesn’t necessarily…

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Bovis Homes Group PLC is a United Kingdom-based company, which is engaged in designing, building and sale of houses for both private customers and Registered Social Landlords. The Company offers a portfolio of properties, including one bedroom apartments, two bedroom apartments, five bedroom apartments and six bedroom detached family homes. The Company carries out and manages a range of housing development activities, including purchasing of the land, building of the houses and the after-care service for its customers. The Company focuses on various activities, which include land acquisition, planning, legal, design, surveying, engineering, purchasing, construction, sales and marketing, public relations and customer service. The Company works in partnership with house builders, local authorities, housing associations and other agencies. more »

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4 Comments on this Article show/hide all

Tristan_Treacy 11th Jul '18 1 of 4

Barratt Developments (LON:BDEV) (which I hold) had a trading update out today. Results were ahead of expectations. The sector as a whole is down over the last few months due to fears over margins going forwards. Barratt Developments (LON:BDEV) actually reported a Y-o-Y increase in margins and better than expected sales in London - so it looks like fears are overdone. I'm very happy to hold on current valuation and yield.

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Edward John Canham 11th Jul '18 2 of 4

You could pick anything out of the house building sector and the quants look good.

The problem is the market hates this sector at the moment.

If you have any doubt about this, look what happened when the BoE increased the possibility of a .25% increase in the base rate in August a few weeks back - the entire sector went down 2-3%. What will happen if they go ahead and then (quite reasonably) suggest another one in 3 months time?

I personally think the market is wrong but I'll run out of money before the market.

Lots comment about the 9%+ yields in this sector - I simply fear you'll lose that in capital in the current environment.


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Roland Head 12th Jul '18 3 of 4

In reply to post #381384

Hi Phil,

Personally, I agree with all of your points. I'm a little nervous about putting money into housing stocks given the political and interest rate risks.

But SIF has always been an experiment in rules-based investing. By necessity I have to avoid making too many (any?) macro judgements as this would conflict with the quantitative metrics I used to select stocks.

Looking at the other side of the coin, I do think that it's possible to make the case for Bovis Homes (LON:BVS) still being in turnaround mode, and thus offering some upside. Growing institutional demand for rental properties could also sustain activity levels and support pricing for longer than expected.

Obviously the housing market will crash at some point. But when? I've long since given up trying to predict this...



Disclosure: I own shares of Bovis Homes Group.

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Roland Head 12th Jul '18 4 of 4

In reply to post #381364

Hi Tristan,

What I thought was most interesting about the Barratt Developments (LON:BDEV) update was the emphasis on new product ranges (houses!) that are quicker and cheaper to build.

It seems as though these could support margin and profit growth even in a flat market environment.

I don't know whether these new designs are simply cheap and cheerful, or genuinely innovative. But I'd say that some innovation in housebuilding techniques is long overdue in the UK. Large builders that choose to invest in this area could perhaps gain an edge on rivals, at least for a few years.



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About Roland Head

Roland Head

I'm a private investor and writer on stock markets, with a particular fondness for free cash flow, dividends and value. I also have a lingering interest in commodity stocks. In earlier life, I worked as an engineer in telecoms and IT. The rules-based approach required for this kind of work undoubtedly influenced my investing style. I also learned a lot from seeing the tech bubble deflate in 2000-1, when I was working for a large and now defunct Canadian firm.  My investment focus is increasingly on developing rules-based strategies such as my Stock in Focus portfolio. This reflects a significant part of my personal portfolio and is the subject of my weekly column here at Stockopedia. more »


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