With signs that many people want to keep working from home and interest rates remaining at record lows, the UK housing market has exploded in 2021. From this, we might assume that the share prices of FTSE 100 housebuilders have been racing ahead in tandem. Sadly for holders, that’s not been the case.

Taylor Wimpey (LSE: TW) is a great example. Year-to-date, its stock has gone nowhere. That trend has continued today, despite the company issuing what I regard as an encouraging update on trading. Is this a great opportunity for me to snap up this cheap dividend stock? 

On target

Like top-tier rival Persimmon earlier this week, Taylor Wimpey said that it had seen robust demand from customers. A sales rate of 0.91 homes per outlet per week has been logged in the second half of its financial year so far. For the year-to-date, this rises to 0.95. 

Despite facing a “competitive” market, TW also added nearly 5,500 plots to its short-term landbank during H2, bringing the total to approximately 84,000. Supported by a £2.8bn order book, it continues to target 17,000 to 18,000 competitions per year (and operating margin of roughly 21%-22%) in the medium term.

Looking ahead, the UK’s third-largest housebuilder said that it was still on track to meet existing guidance. Perhaps most positively for holders, the FTSE 100 member said that the rise in house prices had fully offset the increased cost of building homes. Despite a shortage of materials and drivers across the industry, the company also expects the situation to “gradually improve” from here.

Unfortunately, this wasn’t enough to impress the market.

Should I buy this FTSE 100 dividend stock?

Taylor Wimpey shares currently change hands at just 9 times forecast earnings. That’s cheaper than the aforementioned Persimmon (11 times earnings) but roughly on par with fellow FTSE 100 member Barratt Developments. However, one might argue that Persimmon’s higher returns on capital justify this slight premium. 

When it comes to dividends, however, I think Taylor Wimpey might be the pick of the bunch. A forecast 5.4% yield is lower than peers but analysts believe this will be better covered by profits. For me, the latter really matters. In my book, it’s better to be confident of receiving a smaller (but still chunky) payout over one that may prove too ambitious.

Naturally, it would be a bad idea for me to become dependent on any company for its dividends. This is particularly the case for housebuilders. Market conditions, mortgage availability and government schemes are currently favourable. But how long will this be the case?

A threat to the dividend could be especially problematic for TW owners considering that capital gains haven’t been stellar. Right now, TW’s stock is only 8% higher in value compared to where it stood five years ago. Surprisingly, that’s less than the gain made by the FTSE 100 as a whole.

Stay diversified

Notwithstanding this, I think there’s quite a lot to like here. As long as I remain diversified and hold other FTSE 100 dividend stocks from different sectors, I’d be comfortable building a position from today. This is assuming that generating income from my portfolio was my only priority. If not, I can think of a number of stocks that may offer a more balanced combination of capital growth and cash returns.     

The post 5% dividend yield! Should I buy this cheap FTSE 100 income stock? appeared first on The Twelfth Magpie.

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Paul Summers 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.

Today, my decision to avoid the FTSE 100 housebuilders when putting together a portfolio of dividend stocks looks justified. Here’s why.

FTSE 100 housebuilders: risky dividend stocks

On the few occasions that I’ve covered FTSE 100 housebuilding stocks here at The Motley Fool, I’ve always pointed out that housebuilding is a highly cyclical industry. During the Global Financial Crisis, dividends from the sector completely dried up.

For example, when I covered Berkeley Group Holdings in late 2017 (BKG offered a 5% yield at the time), I said: “Income investors should also keep in mind the cyclical nature of the industry. This has important implications for dividend payouts. Looking at BKG’s dividend history, the company paid shareholders NO dividends between 2005 and 2012.”

Similarly, when I looked at the investment case for Barratt Developments in late 2018 (a nearly 9% yield at the time) I said: “A downturn in the UK’s housing market could have disastrous implications for Barratt’s dividend. Looking at the group’s dividend history, the group paid no dividend at all between 2008 and 2012, after the Global Financial Crisis hit the UK housing market hard.”

Coronavirus dividend cuts

Recently, as the UK has ground to a halt due to the coronavirus pandemic, we’ve seen exactly the same pattern from the majority of the FTSE 100 housebuilders.

For example, in the last few weeks, there have been dividend cuts from Barratt Developments, Taylor Wimpey, and Persimmon. Berkeley Group has said it will maintain its payout for now. There have also been dividend cuts from a number of housebuilders outside the FTSE 100, such as Bellway, Crest Nicholson, Cairn Homes, Redrow, and MJ Gleeson.

Why have so many housebuilders suspended their dividends recently? These companies have been forced to shut down their construction sites in the lockdown, which means conserving cash has become the main priority.

As Taylor Wimpey said in an update last week: “We have taken rapid proactive measures to protect the balance sheet in the short term. However, we are likely to face weeks or months of uncertainty, including periods of inactivity which will limit our ability to complete on homes and therefore generate cash.”

Takeaway

Ultimately, the lesson for dividend investors here is that highly cyclical companies such as housebuilders are generally not good long-term dividend stocks. If your goal is to generate a steady flow of dividends, it’s a good idea to focus on companies that are able to generate steady earnings and cash flow no matter what’s happening to the economy. 

The post FTSE 100 housebuilders: Why I don’t buy them for dividends appeared first on The Twelfth Magpie.

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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Redrow. 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.

There’s strong demand for new homes, underpinned by the Help to Buy scheme and a competitive mortgage market. Big builders can be bought at earnings multiples as low as 8.6 and with dividend yields as high as 10.4%. Investing in our trio seems like a no-brainer.

However, I’m far from convinced it’s wise. Indeed, after a decade of unprecedented economic stimulus, I see think that 2020 could be disastrous for these stocks.

Labour pains

The Labour Party hates companies making ‘unreasonable’ profits, especially from supplying the basic human needs of water, food, warmth and shelter. In recent years, big housebuilders have been the standout flaunters of the kind of supranormal profits, extravagant boardroom bonuses and lavish dividends that Labour despises.

Furthermore, it blames the big builders for a dysfunctional UK housing market. I would expect its policies to put Barratt, Persimmon and Taylor Wimpey on a punitive diet of thin profit-and-dividend gruel — at best. And I’d expect their shares to crash in the event of a Labour general election victory.

Steroids

Housebuilders’ profits have skyrocketed since the introduction of Help to Buy in 2013. The scheme is set to end in 2023, but from 2021 will only be available to first-time buyers and with regional caps on the price tags builders can put on Help to Buy homes.

Help to Buy has faced criticism from across the political spectrum, and while a U-turn on policy seems unlikely, I think an early end to the scheme would smash Barratt, Persimmon and Taylor Wimpey’s share prices. Even as things are, in 2020, I’d anticipate their shares coming under pressure, as the market looks increasingly to the profit-sapping prospect of the reduced dose of Help to Buy steroids in 2021.

Overdue

A ‘desire’ for home ownership shouldn’t be equated with ‘demand’ in the economic model of supply and demand. This can be easily illustrated. If banks were to stop underwriting new mortgages tomorrow, the desire for home ownership wouldn’t change, but demand would fall off a cliff. The only demand for companies like Barratt, Persimmon and Taylor Wimpey would be from a small number of cash buyers.

In an economic downturn, banks inevitably see a rise in bad debts, and become more risk-averse, tightening their lending criteria (including approving fewer mortgages). A disorderly Brexit or damaging continuing period of uncertainty are still not off the agenda, and could yet catalyse a contraction in the UK economy. Furthermore, even if the divorce from Europe goes smoothly, history tells us we’re moving into a period in which a recession is becoming increasingly overdue.

Blink of an eye

Earnings coverage of housebuilders’ dividends is already way below the widely-regarded safety level of 2 — and is as low as 1.1 in the case of Persimmon and Taylor Wimpey.

The trouble with housebuilders, when the economic cycle turns against them, is that falling profits and write-downs of inventories happen so fast, and are of such a magnitude, that strong balance sheets become weak balance sheets — and dividends disappear — in the blink of an eye.

For all of the above risks and reasons, I see Barratt, Persimmon and Taylor Wimpey as stocks to avoid today.

The post 3 reasons why FTSE 100 housebuilders’ shares could crash in 2020 appeared first on The Twelfth Magpie.

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G A Chester 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.

There are also a number of housebuilders in the mid-cap FTSE 250 index. One of these — Crest Nicholson (LSE: CRST) — released its annual results this morning. Its share price and P/E are even more depressed than Taylor Wimpey’s. Could it be another bargain builder to snap up today?

What’s not to like?

The table below summarises some key value indicators for the four stocks, based on their 2018 financial results (actual or forecast).

As you can see, they’re trading on very low P/Es, with supersize dividend yields. Furthermore, a recent trading update from Taylor Wimpey, and today’s results from Crest Nicholson, paint a reasonably sunny picture. Both companies enjoyed a profitable 2018 and finished the year with net cash on their balance sheets. They also said they’ve strong order books.

Both referred to a few clouds in the sky — notably Brexit uncertainty and customer caution in London and the South East. But overall, the impression given was one of maintaining vigilance in the near term and optimism about the longer term. So why are their P/Es so low and dividend yields so high?

Brexit uncertainty

From our parochial UK perspective, “Brexit uncertainty” seems to be the default explanation for all sorts of things, including a housing market that’s creaking in places. However, when we look as far afield as Canada, the US and Australia, housing markets are similarly teetering or falling. Here are a few recent headlines:

• “NYC’s Housing-Market Weakness Spreads From Manhattan To The Outer Boroughs” (19 January)
• “Canada’s Housing Markets End 2018 With A Thud” (15 January)
• “As Investors Flee Australia’s Housing Bust, Sales of New Houses Plunge to Record Low” (21 January)

Furthermore, the US (like the UK) has a good number of listed housebuilders. You’ll find their share prices have performed in much the same way as their UK counterparts. They’re all down from their highs of last year — e.g. PulteGroup (-22%), D. R. Horton (-30%) and Lennar (-38%) — and on very cheap P/Es. Brexit uncertainty? Really?

Blip or bust?

I believe there’s a common issue hitting many housing markets around the world right now. The post-financial-crisis economic crack-cocaine of low interest rates and massive quantitative easing (QE) pumped up asset prices, including property, to unsustainable levels.

Time has now been called on QE and interest rates are starting to rise. The risk is that house prices are heading for a crash. In a crash, builders’ earnings (and their share prices) typically collapse, dividends are suspended, and there’s nothing to do but batten down the hatches and wait for a recovery.

Are the likes of Persimmon, Barratt, Taylor Wimpey and Crest Nicholson merely suffering a Brexit blip, or are we seeing the beginnings of the bust that always follows a housing boom? Personally, I view the risk of the latter as sufficiently serious to avoid these stocks at this stage.

The post Is the Taylor Wimpey share price primed to rocket? appeared first on The Twelfth Magpie.

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G A Chester 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.

According to a report from the National Audit Office, up to 8.3m people are unable to pay off debts or household bills. And the situation is only getting worse, with figures from the Office for National Statistics showing Britons spending an average of £900 more than they earn each year.

Today I’m looking at which FTSE stocks could crash, if the UK consumer debt bubble bursts.

Safe as houses?

Lenders are the obvious place to start. Mortgages represent the lion’s share of household debt, so UK-focused banks with large mortgage books — Lloyds and Royal Bank of Scotland— are potentially vulnerable, as are challenger banks, such as Virgin Money and Paragon, which have been aggressively growing their mortgage books.

I say ‘potentially vulnerable’ because, in the words of Warren Buffett, “you only learn who has been swimming naked when the tide goes out.” If the consumer debt bubble bursts, some lenders’ underwriting standards and affordability assessments will prove to have been inadequate.

We’d likely see a severe tightening of lending criteria. If mortgage availability were to plunge, the FTSE 100‘s housebuilding giants, Barratt, Persimmon and Taylor Wimpey (as well as smaller peers, like Bellway, Berkeley and Redrow)could see demand fall off a cliff.

Unsecured debt

The Bank of England says unsecured debt (credit cards, short-term loans, etc) has hit a record high of £214bn — “far outstripping the personal debt mountain that preceded the 2008 economic crash,” according to The Times. Bloomberg recently reported that Barclays‘ chief executive Jes Staley isn’t too worried about the risks of Brexit and a US-China trade war, as reaching for his Barclays credit card, he says that it’s such cards that are “the biggest risk in the bank.” 

Car finance packages, which now fund four in five new car purchases (up from one in five in 2006) are another significant area of risk. The big banks have exposure here too, but there are also smaller specialists in the field, such as S&U and PCF. The prospect of a flood of drivers returning their cars and walking away from the rest of their loans would be bad news not only for lenders, but also for car dealers, already struggling with other issues, like Vertu, Lookers and Pendragon. Indeed, the consumer discretionary sector in general would be vulnerable, particularly companies like DFS Furniture, which relies heavily on being able to offer customers interest-free finance.

Buy, buy, buy!

Personally, I see the UK household debt bubble, and the consequences of it bursting, as too serious to ignore. As such, I’m avoiding the stocks I’ve mentioned in this article. However, there is a counter-argument from a more sanguine perspective that these are exactly the stocks investors should be snapping up right now.

The balance sheets of banks and housebuilders are stronger than ever and all the companies mentioned have low forecast earnings multiples, providing investors with a ‘margin of safety’. S&U, PCF and DFS are on double-digit multiples, but below the FTSE 100 long-term average of 14, while every other company mentioned is on a single-digit rating, some as cheap as half that of the Footsie long-term average. I’ve almost tempted myself … but not quite.

The post Warning: I think these FTSE stocks could crash if the UK debt bubble bursts appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, Lloyds Banking Group, Pendragon, Redrow, S & U, and Vertu Motors. 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.

Highlighting the jitters surrounding this issue, FTSE 250 business Redrow recently claimed that “clarity over Brexit and the future of Help to Buy would improve market sentiment.”

Whilst some government direction on the future of the initiative would be welcome, of course I think that predictions over a possible termination of the programme seem a bit far-fetched. Just last year the government announced it was ploughing an additional £10bn into Help To Buy, underlining its commitment to the scheme. And despite claims that Help To Buy has had a significant effect in inflating property prices in the UK, data actually shows that that less than 5% of all home sales in the UK involve the use of the scheme.

In fact, reinforcing suggestions that Help To Buy has had a favourable effect on the housing market, the Home Builders Foundation (HBF) recently estimated that some 170,000 properties have been sold with use of the programme, more than four out of five of which have been snapped up by first-time buyers.

What’s more, the trade body has suggested that the median household income for those using the scheme stands at around £49,000, shooting down claims that the programme is being widely taken advantage of by wealthier buyers that the programme was of course not designed for.

Cheap AND cheerful

Stewart Baseley, executive chairman of the HBF, has recently described Help To Buy “an unmitigated success [that] has delivered handsomely on all its objectives,” and also commented that “it has enabled hundreds of thousands of people to realise their dream of owning a home, the vast majority of whom are first time buyers on average incomes.”

Any government action that would see the number of new homeowners getting onto the ladder fall would be politically disastrous for any government, which is why I think the termination of Help To Buy, or even a significant alteration to the terms of the programme, after the current scheme expiry date of March 2021 is pretty unlikely.

What’s more, HBF head Baseley has said that the programme “has led to an unprecedented increase in house-building activity, created tens of thousands of jobs and boosted local economies the length and breadth of the country.”

Without the financial boost that the scheme has provided to the home-builders, the increases in housing supply that Britain so desperately needs could slow to a crawl. And no politician would want this to occur on their watch, needless to say.

At current prices the FTSE 100 house-builders can be picked up for next to nothing. Barratt Developments and Taylor Wimpey both carry a forward P/E ratio of 8.1 times; The Berkeley Group 9.5 times; and Persimmon just 8.6 times.  Sure these businesses aren’t without their share of risk, as I have explained, but in my opinion these low multiples suggest that investor fears over these issues are overblown. Those wishing to pick up a beautiful bargain might want to think about buying into these businesses today.

The post Are the FTSE 100 house-builders the investment opportunities of a lifetime? appeared first on The Twelfth Magpie.

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Royston Wild owns shares in Barratt Developments and Taylor Wimpey. 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.

That said, there are plenty of bona fide, beautiful bargains that I reckon should deliver exceptional long-term returns, like London’s listed housebuilders.

Build a fortune

Only a fool would suggest that conditions in the UK housebuilding market haven’t changed considerably since the Brexit referendum smacked house sales, allied with changing legislation which has decimated demand from buy-to-let landlords.

But there remain plenty of reasons to expect the Footsie’s listed construction giants to deliver brilliant profits growth in the years ahead. And I’ve put my money where my mouth is, what with splashing out on Barratt Developments and Taylor Wimpey in recent times.

Investor appetite for the property builders has disappointed in 2018 following the blockbuster share advances of last year. However, the outlook for these firms remains strong thanks to the meagre housing stock that is propelling demand for new-build places.

And this is evidenced in the steady, (mostly) robust stream of financial updates since the turn of the year. This month Barratt paid testament to its “healthy forward order book;” Persimmon reported “healthy trading” that saw “total enquiry levels running circa 6% ahead of the prior year;” and in April Taylor Wimpey described the “solid consumer demand [that] continues to drive a healthy sales rate.”

The going has been harder for The Berkeley Group due to its significant exposure to the suppressed London market, a region where buyer activity could continue to suffer in the near-term as the Brexit saga drags on. Still, the long-term outlook in the capital and in the surrounding areas remains solid as government’s lack of a detailed homebuilding strategy means that supply is likely to continue lagging demand in the years ahead.

Dividend winners

At any rate, Berkeley Group’s current valuation, like those of its FTSE 100 rivals mentioned above, factors-in the chances of this current disruption to sales activity persisting for a little longer than the City currently envisages.

Indeed, all four companies carry forward P/E ratios below the widely-regarded bargain benchmark of 10 times, leading with Barratt which carries a rock-bottom multiple of 8 times.

What has really attracted me to these housebuilders, however, is the prospect of plump dividends continuing to be shelled out, during the medium term at least.

Each one of Barratt, Taylor Wimpey and Persimmon carry prospective yields more than double that of the big-cap average. These stand at 8.5%, 8.7% and 9.5% respectively. And with earnings expected to continue heading north at all three businesses over the coming period, and cash generation remaining extremely strong as well, I reckon the builders are in great shape to meet current dividend projections from the City.

The post One simple way that value chasers can make a fortune from the FTSE 100 appeared first on The Twelfth Magpie.

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Royston Wild owns shares  in Taylor Wimpey and Barratt Developments. 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.

I’m not so sure. McCarthy remains the largest operator in a niche market that should experience a significant increase in demand over the medium-to-long term as life expectancy continues to rise and more people downsize. Moreover, the business seems to be performing well enough based on today’s full-year trading update.

While the number of completions over the last 12 months was similar to the previous year (2,302), the average selling price of each property rose by 3% (to £273,000), allowing revenue to increase 4% to a record level of £660m. As an indication of the demand, it saw a 21% increase in its order book at year-end to £141m. On the downside, full-year margins are still expected to be lower than in 2016 due to the increased use of incentives, despite a “strong recovery” in operating margin over H2.

Over the reporting period, the company opened 52 new sales outlets. It also developed a strategic partnership with property manager Places for People, allowing the former access to the rental market and new “untapped” locations. 

As far as its outlook is concerned, the firm stated that demand for its homes “remains strong” and that it is confident of delivering on its medium-term goal of building and selling 3,000 properties per annum. The expected “strong upward momentum” seen in average selling prices over H2 is encouraging and McCarthy thinks this is likely to continue into the next financial year.  

Share price aside, I’m fairly happy with the way things are going and will stick with the stock for now. The balance sheet is solid (£30m net cash despite ongoing investment) and the 3% yield — while unlikely to attract dividend hunters on its own — is hardly inadequate.

Another option

Of course, McCarthy & Stone won’t be to all investors’ tastes. Those disinclined to invest in small(er) companies could opt for Barratt Developments (LSE: BDEV) — the UK’s largest housebuilder — instead. 

Today’s annual results for the year to the end of June detailed “another year of strong performance“, according to the £6.2bn cap. Total completions hit 17,395 — its highest volume for nine years. Revenue climbed just under 10% to £4.65bn and pre-tax profit came in at £765m — a rise of 12%. Return on capital employed (ROCE) — often used to judge the quality of a business — continues to increase. At just under 30%, this is now roughly double what most would consider to be an acceptable figure.

Despite operating in a cyclical industry, Barratt also offers considerable appeal to income seekers with today’s corking 39% increase in the final dividend — from 12.3p per share to 17.1p — being accompanied by a 17.3p special dividend.

Although the recent slowdown in the housing market isn’t desirable, CEO David Thomas believes the company starts 2017/18 in a “good position“, with forward sales up almost 14% to £2.75bn. This, combined with Barratt’s solid balance sheet (net cash up 22% to £724m) and the “positive mortgage environment” should see the share price momentum experienced over the last year (+29%) continue for a while yet.

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Paul Summers owns shares in McCarthy & Stone. 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.

Bellway

One such company is Newcastle-based Bellway (LSE: BWY), a geographically-diversified developer of traditional family homes and affordable apartments.

Last month, Bellway issued a trading update for the six months to 31 January 2017, which showed the group make a significant increase in both the number of legal completions and the value of the forward order book. Housing completions increased by 6.5% to 4,462, adding to the UK’s much-needed supply of new homes, while its forward order book swelled 9.1% to £1,121m.

Bellway’s share price has outperformed many of its peers and is now trading just below its pre-referendum high of 2,777p. The company has no doubt been helped by its limited exposure to Central London, where prices have remained sluggish since the Brexit vote of last June, and recent stamp duty changes.

Looking forward, Bellway is well placed to benefit from its accelerated pace of new home construction, as demand remains resilient outside of Central London despite the uncertain macroeconomic backdrop. As such, the group is seeing no let up in viewings. Meanwhile, its reservation rate increased by 6% on last year, to 166 homes per week.

With a forward P/E of just 7.8, Bellway trades at a noticeable discount to the sector average of 9.7. However, with a dividend yield of 4.0%, its shares don’t offer as much in terms of income than many of its bigger peers.

Ireland

Irish housebuilder Cairn Homes (LSE: CRN) is my pick for investors who are prepared to wait a couple of years. Cairn Homes listed on the London Stock Exchange only in 2015, and the housebuilder is still in the process of ramping up its construction activity.

The company today announced its 2016 full-year results, which showed an 11-fold increase in revenues to €40.9m on 105 unit completions. The company made a gross profit of €7.1m, up from €0.7m, with a gross profit margin of 17.3%. Operating profit was €3.6m, up from a loss of €3.8m in 2015.

Cairn Homes still has a long way to go before it generates significant profits, but the company is on target to meet its optimistic growth expectations. It expects to complete between 375 and 400 new homes this year, with the number of completions expected to climb to 850 units by 2018 and 1,200 units by 2019.

Moreover, Cairn Homes benefits from favourable fundamentals, as residential property prices are forecast to grow even more robustly in Ireland than in the UK in 2017. The Irish market is set to benefit from a number of bullish tailwinds over the next few years, such as the newly-introduced help-to-buy scheme, the recent relaxation in the Central Bank lending limits and the constrained supply of new homes since the housing crash of 2007.

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The company reported impressive full-year results on Tuesday. Revenue jumped 24% to £997m. This was achieved through a combination of price increases across most of the company’s locations and an increase in volume sold and built. The business believes it’s on track to deliver 4,000 homes and £1.4bn of sales by a year by 2019. An abundance of suitable land should help the company towards this goal too. 

Profit before tax increased 26%, as a result of a “robust market underpinned by strong demand for new homes.” Crest Nicholson hiked its dividend by 40% in response to the excellent results, bringing the total dividend to 27.6p for a yield of 5.6%.

London property only accounts for around 10% of its portfolio too, so if you’re worried about our capital then perhaps Crest Nicholson is a suitable choice.  

The company admits however, that the landscape of the property market could change as we leave the EU. A potential hard Brexit might impact the number of skilled labourers in the country, thus impeding housebuilders. House prices certainly look high, but the need for new housing currently dwarfs the supply, so price falls aren’t necessarily guaranteed, let alone imminent.

On balance, I feel Crest Nicholson may present an interesting opportunity if you feel confident about the sector’s future. 

Land Securities

But if housebuilders don’t take your fancy, it might pay off to investigate the more stable REITs (real estate investment trusts) for predictable income from property. A REIT is a company that owns or finances income-producing real estate and typically pays out the majority of profits to shareholders in the form of dividends.

Land Securities (LSE: LAND) currently sports a 3.6% yield and trades at a significant discount to book value (0.68), indicating there may be some downside protection built into the share price already.

The seemingly cheap valuations attached to both these companies might be attributable to potential interest rate rises. Rate hikes makes debts, including mortgages, more expensive, meaning high-priced houses could become unattainable for buyers. This could lead to price falls across the board. But rapid rate hikes still seems unlikely, in my view, given the inherent uncertainty surrounding Brexit and the BoE’s general caution in its economic forecasts. 

Essentially, both of these income picks are dependent on the UK housing market. If you don’t believe housing has a good outlook post-Brexit, maybe you’d be best off investing in less cyclical sectors.

The post Why I’m interested in this 5.6% yielder after FY results appeared first on The Twelfth Magpie.

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Zach Coffell has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.