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Questor: a booming property market means that there is more to come from these three tips

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·4-min read
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Sold houses
Sold houses

The fastest pace of house price growth for 15 years has put a rocket under Bellway’s share price. The housebuilder has surged by 23pc, and outperformed the FTSE 100 by nine percentage points, since we tipped it as a buy in July last year.

In Questor’s view, the company’s prospects remain very attractive. House prices continue to be relatively affordable because mortgage repayments account for less than 30pc of average earnings. This is below the 46pc figure recorded shortly before the global financial crisis and is similar to the level recorded in the early 2000s. It suggests that modest interest rate rises may prove insufficient to curb a rampant housing market over the coming months.

Moreover, there have been just 167,000 new housing starts in England in the past year. This pace of building is unlikely to significantly change the long-term supply/demand imbalance within the residential property sector. Indeed, the Office for National Statistics expects the number of households in England to rise by 164,000 a year through to 2028.

Of course, government support for the housing sector will inevitably ebb and flow. Notably, the scheduled end of the Help to Buy scheme in 2023 could cause a degree of disruption for housebuilders.

Equally, though, it may encourage first-time buyers to bring forward their plans to avoid missing out on government help.

In addition, measures such as the mortgage guarantee scheme, coupled with possible regulatory changes that could include a cut in long-term interest rate assumptions used by lenders, may mean housing affordability stays surprisingly high.

Since our original tip, Bellway has further strengthened its market position. For example, in its latest financial year the company increased the size of its owned and controlled land bank by 25pc and it now has more than 56,000 plots. It has also kept a solid financial position, evidenced via net cash of £330m, and is aiming to lift its annual output of new homes by 20pc over the next two years.

Despite this buoyant outlook, the firm’s shares continue to offer a wide margin of safety. They trade on a price-to-earnings ratio of 10. This suggests that the stock market continues to materially undervalue the builder’s financial position, market outlook and strategy. Keep buying.

Questor says: buy

Ticker: BWY

Share price at close: £32.20

Update: Segro, Tritax Big Box

Residential housing is not the only booming part of the property market. Seemingly insatiable demand for warehouses provided by Segro, and the vast out-of-town warehouses owned by Tritax Big Box, have propelled their share prices higher. They have gained 183pc and 70pc respectively since we tipped them in July 2017 and September 2019. The FTSE 100 is little changed over both periods.

Demand for warehouses has been boosted by an accelerated shift to online retail caused by Covid. Indeed, e-commerce sales as a proportion of total retail sales have increased from 19pc to 26pc over the past two years.

In contrast to rising demand for warehouses, their supply remains severely limited. A lack of suitable locations and competing demands for their use mean that the current imbalance between demand and supply could widen. As a result, Segro and Tritax Big Box’s substantial pipelines of space under construction may easily be filled by new tenants.

The latest updates from both firms highlighted the ongoing impact of high demand and low supply on their performance. They reported low vacancy rates, strong rental growth and high rates of rent collection. In fact, Tritax Big Box’s vacancy rate has consistently been 0pc over recent months. Meanwhile, Segro’s new headline rents on review and renewal were 13pc higher in the first nine months of the year.

In Questor’s view, both companies continue to offer good value for money given their long-term outlook. Price-to-book ratios of 1.5 for Segro and 1.3 for Tritax Big Box suggest more gains are ahead.

Questor says: buy

Tickers: SGRO, BBOX

Share prices at close: £13.86, 238p

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

Read Questor’s rules of investment before you follow our tips.

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