Despite the economic uncertainties caused by the pandemic, the UK housing market has remained robust over the past year. According to the Bureau of National Statistics:
"Recent price increases could reflect a range of factors, including pent-up demand, some possible changes in housing preferences since the pandemic, and a response to changes made to real estate transaction taxes in the countries."
Global real estate group Savills Further highlights:
"House prices rose 2.1% in April… This was the strongest month-on-month increase since February 2004 and brings the annual increase in UK house prices to 7.1%. The growth of house prices will rise during the summer. Demand remains strong… But the supply of houses for sale has not kept up with the level of demand."
In fact, the demand for new housing in the UK is robust. The government currently has a target of 300,000 new homes per year. That's why today's article looks at members' home builder Barratt Developments (LON:) (OTC:). BDEV stocks are up 16% over the year, recently hitting a 52-week high of 779.40p.
Weekly graph of Barratt developments.
On June 3, shares closed at 760 pence ($21.56 for US-domiciled stocks). The current price supports a dividend yield of almost 1%. The market cap is £7.74 billion (or $10.92 billion).
Recent statistics
The history of the group goes back to the early 1950s. It was listed on the London Stock Exchange in 1968.
Since then, Barratt has become the UK's largest home builder and has the maximum 5-star rating in the Home Builders Federation's new annual customer satisfaction survey.
In early January, Barratt released a robust publication covering the six-month period ending December 31. Turnover was £2.5 billion (or $3.53 billion), up 10.1% year-on-year. Pre-tax profit was £430.2 million (or $606.7 million), up 1.7% year-on-year.
The trading update released on May 6 continued to show robust numbers. Total forward sales were 14,846 homes, up 4.7% from 2019. In May 2020 and May 2019, comparable statistics were 12,205 homes and 14,181 homes, respectively.
CEO David Thomas said:
"We've seen strong demand for our high-quality, energy-efficient homes on well-designed developments, which means we now expect to increase full completions to between 16,000 and 16,250 homes this year."
Investors were pleased to learn that Barratt has delivered more homes and sold at higher prices. Following the trade update, a number of analysts have revised earnings forecasts for this year and next. The forward P/E and P/S ratios of BDEV stocks are 10.40 and 2.14 respectively.
Bottom Line
A booming market in the UK has led to strong gains for BDEV stocks, one of the strongest names among homebuilders. However, given how far it has progressed in the past year, it could be easy to take profits in the short term.
We should also remind potential investors that in addition to the increase in raw material prices, construction costs have also increased. In other words, there may be supply chain issues that affect profit margins.
Therefore, we would side with the curbing enthusiasm and wait for a pullback before buying the stock price. A possible drop to the level of 730p or below would improve the margin of safety. In February 2020, BDEV's shares were over 870p.
Therefore, further fundamental force could easily push the price back towards those levels in the coming quarters. Given the importance of the housing sector to the UK economy and the number of new homes required each year, Barratt has significant potential to increase both revenue and revenue.
Finally, just like in the UK, last year was also a strong year for the US housing market. Investors who believe the long-term US housing market will remain strong in the second half of the year may also want to consider investing in ETFs targeting US homebuilders. Examples include:
iShares U.S. Home Construction ETF (NYSE:) – up 25.3% YTD;
SPDR® S&P Homebuilders ETF (NYSE:) – up 27.1% YTD.
