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Questor: the housing market is in disarray – but this makes Taylor Wimpey all the more appealing

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·4-min read
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 A builder working for Taylor Wimpey builds a roof
A builder working for Taylor Wimpey builds a roof

Rising interest rates are widely expected to slow the housing market severely. Alongside a cost-of-living crisis that is putting significant pressure on discretionary incomes, higher mortgage costs are expected to reduce demand for new homes.

This outlook has contributed to a 28pc fall in Taylor Wimpey’s share price so far this year. The FTSE 100 housebuilder’s value has also been hurt by a 50pc rise in the provision it is making to remedy cladding problems. The shares are now down by 21pc since our tip in 2018.

In Questor’s view, the stock’s lower valuation presents an even more appealing buying opportunity for long-term investors. It now trades only slightly above its net asset value, while a forecast price-to-earnings ratio of less than 7 also suggests that investors have factored in a leaner period for housebuilders.

The company’s net cash of £837m suggests that it not only has the financial means to survive a tougher period for the housing market but can capitalise on it by being able to buy land more cheaply. It followed a similar strategy in the depths of the pandemic and now has a significant pipeline of 145,000 potential plots. This positions it to take advantage of an ongoing supply/demand imbalance within the housing market that successive governments have failed to correct.

Indeed, it seems likely that policies designed to support demand, similar to the mortgage guarantee and Help to Buy schemes, scheduled to end over the next year, may be pursued as the next general election moves closer.

Separately, Taylor Wimpey’s recent change in chief executive is unlikely to prompt much change in strategy as it involved the promotion of an internal candidate. While its aim to improve margins over the next couple of years may prove challenging, its capacity to ride out an industry downturn is likely to improve its competitive position relative to smaller rivals.

The company’s shares are likely to remain volatile as economic events unfold. But its sound financial position, low valuation and long-term recovery prospects offer significant capital growth potential in the coming years.

Questor says: buy

Ticker: TW.

Share price at close: 127.25p

Update: Segro

The cost-of-living crisis has also weighed on Segro’s share price. The warehouse owner’s market value has fallen by 23pc this year as investors have priced in the prospect of lower demand for commercial space amid a tougher environment for retailers.

That sector accounts for 19pc of the company’s rental income and its shares fell heavily following Amazon’s profit warning earlier this month. The online retailer is Segro’s largest customer, accounting for 7pc of its total rent, and is seen as a bellwether for the wider retail industry.

In our view, Segro’s share price fall offers a sound buying opportunity for long-term investors. It continues to benefit from long-standing trends that have not changed over recent months and could act as major catalysts for its financial performance.

For example, two thirds of its warehouse portfolio is in urban areas. Rising demand from long-standing urbanisation trends across Europe, and constrained supply of new warehouses thanks to competing land uses, could stimulate rental growth.

Similarly, the shift from in-store to online retailing, which has been taking place for many years, could lead to rising demand for warehouse space. This may be particularly relevant in mainland Europe, which accounts for a third of Segro’s income and where the adoption of e-commerce has been slower than in Britain and could therefore offer more growth in future.

The company’s development pipeline offers about £73m in potential annual rent, which equates to 13pc of its total income in 2021. Encouragingly, 63pc of rent across its development pipeline has been secured. Meanwhile, its loan-to-value ratio of 24pc suggests it continues to be conservatively run.

Despite their recent fall the shares are still 128pc higher than at the time of our original tip in July 2017. Trading at net asset value, it offers excellent value for money on a long-term view.

Questor says: buy

Ticker: SGRO

Share price at close: £11.13

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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