Housebuilder stocks have delivered strong returns over recent years due to an increasing population and a growing shortage of affordable housing – plus the fact that they were coming from a very low valuation base and have benefitted from an improving UK economy.
For similar reasons (as well as the fact they offer an attractive yield), bricks and mortar open-ended funds as well as Real Estate Investment Trusts (REITS) have also fared well, significantly outperforming the FTSE 350 index over the last five years.
Performance of indices over 5yrs
Source: FE Analytics
As all investors know though, what goes up usually comes down– the difficult aspect is timing when this is going to happen. 
While there have been murmurings that the rally in property-related assets has run its course, a lot of investors that want exposure to the booming property market have invested in housebuilder stocks for increased liquidity.
In fact, co-founder of Slater Investments Mark Slater (pictured) explained recently that his exposure to housebuilders in both his income and growth portfolios hugely benefitted the funds last year, both of which are in the top decile in 2015 on an annualised basis.
“The house builders gave us a good performance last year. The biggest contribution [in our growth portfolio] was from Bellway which is our largest housebuilding investment and that was a 1.6 per cent contribution,” the manager said.
“We also own shares in Redrow, Barratt Developments, Bovis Homes Group and Galliford Try. As a whole, those companies gave us a 3.4 per cent contribution which is fairly significant.”
According to data released from the Investment Association on Monday, though, property funds saw a net retail outflow of £27m in January, which is the first time the sector has fallen out of favour so far since the start of 2015.
Will this negative sentiment start to cross over to housebuilding stocks and should investors be taking profits from property-linked stocks before the market starts to turn?
Tristan Chapple, senior research analyst and partner at Phoenix Asset Management, says that the firm owns Barratt Developments and Bellway and points out that the strong performance of housebuilding shares is a reflection of the very low valuations they started with.
Despite their strong performance though, he says that valuations for the sector remain attractive.
“There is a housing shortage in the UK. We need to build 250,000 houses per year and we are building 150,000. That underpins demand and is the main reason why the UK has persistently high house prices relative to some other countries. The shortage of housing in the UK means that Barratt developments/Bellway both have the potential to grow their businesses for many years to come,” he said.
“The housebuilders are also benefitting from a very positive political backdrop. The UK government has said that solving the housing shortage is one of its highest priorities and has backed this ambition up with a number of significant policy initiatives.”
“For example, the UK government’s ‘Help to Buy’ scheme is making it easier for people to get on the housing ladder by providing a 20 per cent contribution to the deposit needed to buy a new build house. The scheme currently accounts for 30 to 35 per cent of the houses sold by a UK housebuilder.”
In contrast, Henderson’s Jamie Ross, who manages the £388m Henderson UK Alpha fund, believes that valuations have now become much less attractive, and has halved his exposure to housebuilders by selling Taylor Wimpey and holding onto Bellway.
“Our view on housebuilders over the last two-to-three years has been that it’s an attractive market. Two or three years ago we wanted a lot of exposure to it, then over the years we’ve seen the companies re-rate, valuations are now far less attractive than when we initially purchased but we believe they’re still relatively attractive, so we have been quite pragmatic and tried to cut our exposure down,” he explained.
Another way the manager chooses to benefit from the strong performance of housebuilders without paying high costs is through stocks with the sector as its main end market.
For instance, Ross owns Ibstock Brick which is a mid-cap building materials supplier. It floated on the London Stock Exchange in the second half of 2015 and since then, it has provided a positive return of 1.84 per cent compared to the FTSE 250’s loss of 2.09 per cent.
Performance of stock vs index since IPO
Source: FE Analytics
“The brick market in the UK is very consolidated, so pricing power tends to be very strong, and what’s more the main end market tends to be housebuilders and we all know that we need to build far more houses than we are building,” he added.
Patrick Connolly, head of communications at Chase de Vere, says that the firm’s clients have some access to housebuilders from the more diversified funds that have exposure to them, but adds that it has specific exposure to bricks and mortar commercial property in most client portfolios through funds such as M&G Property Portfolio, L&G UK Property and Henderson UK Property.
“Property investments of this type can provide consistent returns and strong diversification benefits when held alongside other asset classes such as equities and fixed interest,” he said.
“Our clients will typically have been 5 per cent and 15 per cent of their portfolios invested in commercial property. From our perspective we hold property to provide consistent returns or income and for diversification benefits, which is why we use ‘bricks and mortar’ investment funds.”
Martin Bamford, managing director at Informed Choice, holds a similar weighting of property exposure in his clients’ portfolios, but says this is not as high as it has been historically.
Like Connolly, he also particularly likes FE Alpha Manager Michael Barrie and Matt Jarvis’s L&G UK Property fund as it has a diverse portfolio of properties across shops, retail parks and warehouses.
The manager adds that the fund also holds a small amount of indirect property and cash.
Performance of fund vs sector under Barrie and Jarvis
Source: FE Analytics
“Holding too much property within your portfolio can be risky, as it is a relatively illiquid asset. Property funds tend to have the ability to delay withdrawals in times of market turmoil, to avoid being forced to sell assets cheaply,” he said.
“For more cautious investors, a slightly higher allocation to property of say 15 per cent could be advisable, but we would rarely recommend exposing more than 20 per cent of your portfolio to property.”
“House builders should have some strong years ahead, as interest rates are expected to remain low and the government has a clear house building agenda. Very high house prices, especially here in the South East, are making it very difficult for first time buyers, which can stagnate property transaction chains. House builders who are delivering genuinely affordable housing in areas of strong demand should do well in the medium term.”
