The government’s Help-to-Buy scheme is causing a lot of controversy, with talk of stoking another housing bubble. But as far as housebuilder Redrow (LSE: RDW) is concerned, it has been doing very well without its help. Redrow delivered an impressive set of annual results last week with trading profits up by over 50%. It sold 15% more houses and got nearly 12% more for each one, having focused on building better-quality properties.
Help to Buy only accounted for 3% of the 2,800-plus houses sold, as it only came in over the last couple of months of the financial year. The scheme should have a much greater impact in 2014. Private reservations per site are up 40% and the City sees this as feeding through to another big rise in profits. The government is clearly aiming to boost the housing market and keep it on track until at least the next election in 2015. If it can do this, then Redrow’s profits could go up a long way from current levels. It made £154m with 20% profit margins in 2005, compared with just £73m and 12% margins in 2013.
A big improvement is factored into the shares, which now trade at over 1.4 times net asset value. However, as prices rise, land bought in recent years could see substantial increases in value. With Help to Buy being extended to the whole housing market next year, this scenario could happen. Sure, the housing market is not based on sound fundamentals and this means there are big risks involved. Buying shares in housebuilders is a speculative punt – but one that could continue to pay off over the next year or so.
Verdict: speculative short-term buy