How investors can play the housing market boom

Chancellor George Osborne has been fanning the sparks of a booming housing market in bid to lift the economy out of its protracted rut.

By January 2014, four schemes will have been pedalled out using public funding to help both first time buyers and second steppers onto the property ladder.

Such schemes have also opened up opportunities for savvy investors.

Charles Galbraith, managing director of Sippdeal, the investment platform, says: "House building stocks have surged since the announcement of the introduction of the Help to Buy scheme in the Budget.

He says that while it is prudent to question whether there is further room for growth, analysts and brokers believe there are strong grounds for forecasting an extended run for quality house builders and businesses in a range of related sectors, especially with the second phase of Help to Buy coming in January 2014.

"We expect we will see a lot more share dealing activity in the house building and property sectors as investors recognise this potential," he says.

Of course, adding to the story is the announcement earlier this month by Bank of England governor Mark Carney that interest rates will stay at 0.5% until unemployment falls to 7%, which isn't expected for at least three years.

This is yet further good news for homeowners and as a result analysts have become more positive about the mortgage market.

So, how can investors profit? Here, we explain:

Buy-to-let

Taking the landlord route is a traditional way to play the recovery.

In fact there was a surge in the number of buy-to-let landlords in the three months to June.

Gary Reynolds of Courtiers Asset Management says that while savings rates remain poor, this route is a better option for cash buyers.

"Rental yields are good and cash buyers are in a good position as they are less likely to be bothered by increases in the Bank's base rate," he says.

"But buyers need to be careful not to speculate on the housing market and buy-to-let should be looked at for rental income, as that rental market is booming."

Reynolds also points to the "structural deficit in housing stock" where supply continues to fall behind increasing demand.

Adrian Lowcock of Hargreaves Lansdown says investors should beware that headline yields advertised for buy-to-lets are not the actual yields investors will receive. Mortgage interest payments, maintenance charges and vacancy rates all eat into actual returns.

Housebuilders, estate agents and the multiplier effect

Since 20 March house builders have returned between 6% and 57%, according to Lowcock. Compared to the FTSE All-Share, which returned 3.87% over the same period, these companies are an attractive investment option and are only set to do even better as the housing recovery continues.

Although shares in the bigger name brands are expensive, Robin West, co-manager of the UK Aviva Investors Small Companies fund, thinks many companies are well placed to profit from the increasing number of Brits being forced into the rental market.

Historically, estate agents have been focused on selling new properties and lettings have been seen as the poor cousin of the house sales services, however as house prices keep many off the property ladder, this space is ripe for returns.

West points to companies like LSL, which also owns Zoopla, as a good play. The company last month reported pre-tax profits of nearly £8.5m and is positive going into 2014.

Decorating firms such as Topps Tiles are also likely to benefit as is St Modwen Properties, which owns large areas of land. This is attractive because of the positive correlation between rising house prices and land prices.

Jonathan Ingram and John Baker, co-portfolio managers of the JP Morgan UK Dynamic fund, also point to Ashtead, one of the largest equipment rental groups in the world. It is well positioned thanks to a rejuvenation of the country's construction business. The company rents equipment to builders and has a flexible cost model.

 

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• Topics
• Property Investment
• housing market
• George Osborne
• Mark Carney
• Bank of England
• residential property