House builders are looking good value with the opportunity of future growth looking realistic due to...
House builders are looking good value with the opportunity of future growth looking realistic due to the changing social climate.
The FTSE Construction and Building materials index is currently trading on a price to earnings ratio of 10.5 times and offers a yield of 4.04%. In contrast the FTSE All-Share is trading at a P/E of 25 times and provides a yield of 2.83%.
Aberdeen Asset Managers is favouring house builders as the fundamentals look attractive, according to Neil Cumming, manager of Aberdeen High Income. He says: "Mortgages are relatively low and the supply of houses is being restricted due to planning regulations." He adds that the increase in the number of divorces, an ageing population and the fact that more single young people are buying houses means there is a growth in demand for one and two bedroom homes.
Geoff Miller, manager of Exeter Equity Income, is also overweight house builders.
He says: "Although growth will not be as strong in the future as it has been in the past, nevertheless house builders are very cheap and good value at the moment.
"We are typically favouring the volume house builders, such as Barratt Development, because they are the cheapest.
In the longer term I will probably switch out of the volume providers into the niche providers, such as Berkeley Group, which add value, are more profitable and cater for second and third-time buyers."
In a buoyant housing market companies, such as Barratt, are generating decent profits and producing good cashflows, something which has been a problem in the past, Miller says.
He adds: "This situation has now changed and companies are reducing the size of their land banks and instead buying options on land. This allows them to buy the land any time they want and reduces the adverse affects of cyclicality which land prices can have on house builders."
Overall Miller regards house builders as an attractive area to invest in on a cyclical basis, but as a secular theme for the long term he believes it will not produce bumper returns.
While being positive on house builders Miller is underweight building material suppliers. He does not see the point in investing in both house builders and building material companies when the latter is twice as expensive.
On a fundamentals basis Miller can not see much more growth among building material suppliers unless there is corporate activity. He adds: "The only reason to buy suppliers is if the euro strengthens, but given the current valuations they are on a lot of the growth is already priced in."
Cumming is relatively cautious towards suppliers with exposure to the US, even though results published two weeks ago showed that interest rates would not have to rise as steeply as previously anticipated.
The May jobs report showed that unemployment in the US rose to 4.1% from April's 30-year low of 3.9%. The report also showed the number of private sector jobs fell for the first time in more than four years, while wages rose less than expected.
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