All house builders should benefit from a positive environment for new housing, but some construction stocks will do better than others.
Construction stocks to buy
Persimmon (LSE: PSN) is generating returns far below its old levels, leaving plenty of room for improvement. It is well exposed to parts of the country where the affordability of housing is less stretched and is, therefore, less at risk if high mortgage rates remain unhelpful.
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MJ Gleeson (LSE: GLEE) has the purest exposure to houses built for those on a lower income and, therefore, those most positively affected by plans to improve the affordability of housing. The types of houses built by MJ Gleeson are likely to be favoured by the new government, which made affordability a key election point.
Vistry (LSE: VTY) has perhaps the greatest potential because it is converting from being a traditional house builder to using a partnership model. Partnerships require much less capital and since Vistry is still transitioning to the model, its balance sheet is strong. At present, the plan is to return almost a quarter of the market capitalisation in shareholder returns. But much of this return is discretionary and, should growth opportunities increase significantly, Vistry is uniquely well-placed to fund the expansion. Additionally, its partnership model means it is in the best position to fulfil any strategic housing developments such as those from local housing authorities.
Turn your attention to the supply chain
However, the greatest investment opportunities may lie within the supply chain, where the capacity for a sudden increase in demand is most constrained. Here simple supply and demand dynamics make for an attractive backdrop. There will be a delayed response to bringing on new supply of heavy raw materials, as opening new factories and quarries takes even longer than new housing developments.
Due to weakness in UK construction in the last two years, valuations for the suppliers are very undemanding, making investments here particularly attractive. The area least able to respond to significantly higher demand, as well as being the purest play on house building, is brick manufacturing.
Both Ibstock (LSE: IBST) and Forterra (LSE: FORT) could be big winners with smaller, specialist manufacturer Michelmersh (LSE: MBH) also likely to benefit. Elsewhere, any capacity-constrained industry supplying the house builders should also do well.
In aggregates and cement, Breedon (LSE: BREE) is well positioned with sales to both the housing sector and the infrastructure that supports housing. Genuit (LSE: GEN) provides pipes and filtration to the housing sector. While it is higher up the value chain than heavyside materials, its products also don’t travel well and as a local producer, it should benefit.
Finally, equipment will see higher demand, which for a few years at least should lead to greater rental rates benefiting the likes of VP Group (LSE: VP).
Jamie holds shares in Breedon, Forterra and Vistry.
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