Housing Is Bouncing Back Strongly

Published in Investing on 27 February 2012

Results from Bovis could herald a new dawn for house construction.

What are the best kinds of shares to buy -- ones that are popular and flying high, or ones that are down in the dumps? Well, there are few things nicer than a juicy high-quality sector, packed full of good companies that are going to be producing profits for decades to come, but which is badly oversold because its market has been through a tough patch.

And that's the state our housebuilders are in right now. After the buy-to-let bubble was replaced by the sub-prime crisis, shares plummeted. Sure, much of it was deserved, but just as investors always overreact at extremes, they were hammered too hard.

Back in August I was getting bullish about the sector, though then I preferred construction companies that weren't pure plays on housing at the time. But since then, they've all bounced back strongly.

A nice rebound

Today, Bovis Homes (LSE: BVS) showed us just what a bargain they have been, recording a healthy jump in for 2011. Before tax, Bovis made £32.1m, 74% higher than in 2010, which was in line with the firm's bullish January update.

Housing market in a slump? There were 2,000 more Bovis homes sold in 2011 than in 2010, at an average price that rose 5% to £180,000. And the company started 2012 with stronger forward sales than in 2011 -- 568 homes pre-sold opposed to 420 at the same point last year.

And there's a dividend, too. At 5p per share, it's only a 1% yield. But it's up on last year's 3p and is heading in the right direction.

Many people assume that you can only really make good profits selling houses when prices are booming. But when prices are high, so is the cost of land, and there's no guarantee that profit margins will be higher in such times.

Fruit of the land

In fact, partly through buying up cheap land when the market slumped in 2009, Bovis has seen its gross margins strengthen, rising from 17.9% to 20.8% (excluding land sales). And that has hopefully helped set things up nicely for the future too, with chief executive David Ritchie telling us:

"The substantial land investment in recent years will deliver a strong increase in active sales outlets in 2012. Based on a continuation of current market conditions, this will further enhance volumes, sales prices and profit margins."

Despite the share price having risen nicely over the past six months, Mr Market reacted poorly to today's news, sending the price down 4% to 485p at the time of writing.

I reckon Mr Market is wrong today.

More from Alan Oscroft:

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and2bat 27 Feb 2012 , 7:50pm

It is hard to understand statements in this article regarding house building bouncing back in a recession - such as the country has been experiencing. Mortgage leaning is not supporting the housing industry to increase sales only builders discounting and financing deals to sell, sometimes with only 5% deposits.
How come land prices have weakened when everyone knows they have increased in price, unlike house prices since 2009?The builders were quick to devalue their land holdings as I remember at the start of the housing bust too. I think it's wishfull thinking on their part if they are hoping for a spring bounce if you ask me!

UncleEbenezer 28 Feb 2012 , 2:09am

The spring bounce is amongst buyers getting in ahead of stamp duty in the £125-250k band (which must account for a high proportion of all house sales).

Particularly helpful to Bovis and its peers, new houses also benefit from yet another round of taxpayer funding with those government-backed mortgages.

tru2me 28 Feb 2012 , 3:59pm

Good points UncleEbenezer.
Also boosting sales is;

According to broker Mortgage Advice Bureau, the number of 95% loan-to-value (LTV) deals currently open to first-time buyers is at a four-year high, with 59 deals available from 21 different lenders.


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