Brexit-related political uncertainty seems to be taking a toll on the UK’s housing market, with the latest numbers for home sales dropping by 16.5% in June compared to last year. House price inflation also slowed down as per the latest numbers from the Office of National Statistics. But that’s not deterring investors from the sector. Case in point being the FTSE 100 property construction company Barratt Developments (LSE: LON:BDEV), whose share price has risen sharply in the month driven by a good set of results. The upturn in share price fortunes after two months of moving sideways was directly, I believe, because of better-than-expected pre-tax profits and increased housing completions shown in the latest update.
Sunny times predicted But considering that we at The Motley Fool are most keen on companies with good long-term potential, it’s essential to suss out the prospects for the company. Like investors, the company too is unfazed by the developments in the wider environment that could send the real estate sector into a cyclical slowdown. In its latest update, the company said: “Whilst there remains some economic and political uncertainty, the Group is in a strong position…. We believe that this gives us the resilience and flexibility to react to potential changes in the operating environment in FY20 and beyond.”
Favourable comparison to peers I also like the fact that the price-to-earnings ratio at 9.2x isn’t far off from its FTSE 100 peers like Berkeley Group Holdings at 8.2x and Taylor Wimpey (LON:TW) at 8.7x, which basically means that despite the price increase, it’s quite affordable. The next question, though, remains – it’s all well and good that the company is positive about the future and its shares are still affordable, but should investors ignore the clouds on the horizon?
Risks to be noted Needless to say, investors should really not overlook the overall environment, especially since real estate can be sensitive than some of the other sectors. There are already signs of slowdown in the UK economy and, as is to be expected, a possibility of a housing market slowdown seems to be rising too. But for now, I wouldn’t be too worried about the long-term prospects, even though caution is called for in the short term. In fact, it’s worth pointing out that even in the short term, there’s a wild card in the deck: a good Brexit deal or incentives to the housing market in the post-Brexit UK could be great for the industry. But that’s all up in the air right now.
Defensive alternative If share price gyrations don’t sit well with your investing personality, however, I suggest considering defensive plays as well. For instance, do look at packaging provider Mondi (LON:MNDI), a sector in which there are relatively fewer surprises. Its financial performance has been fine and likely to remain so in the near future as well. But if some risk sits fine with you, Barratt is the share to consider in my opinion.
Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019