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.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
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.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
-
Steve Webb: The triple lock is there to do a job. I’m not embarrassed or ashamed of itThe triple lock means 13 million pensioners will now get an above-inflation state pension boost in April. While the rising cost of the policy has stirred controversy, Steve Webb, who served as pensions minister when it was introduced, argues the triple lock is vital and should stay. Webb speaks to Kalpana Fitzpatrick on the new episode of MoneyWeek Talks – out now.
-
How retirement pots risk running out 11 years early if inflation remains highPension savers could find their retirement income may not last as long as they anticipated over fears that inflation may not slow down
-
Chen Zhi: the kingpin of a global conspiracyChen Zhi appeared to be a business prodigy investing in everything from real estate to airlines. Prosecutors allege he is the head of something more sinister
-
Canada will be a winner in this new era of deglobalisation and populismGreg Eckel, portfolio manager at Canadian General Investments, selects three Canadian stocks
-
Jim O’Neill on nearly 25 years of the BRICSJim O’Neill, who coined the acronym BRICS in 2001, tells MoneyWeek how the group is progressing
-
Circle sets a new gold standard for cryptocurrenciesCryptocurrencies have existed in a kind of financial Wild West. No longer – they are entering the mainstream, and US-listed Circle is ideally placed to benefit
-
8 of the best converted industrial properties for saleThe best converted industrial properties for sale – from a Victorian railway station in Norfolk to a Grade II-listed former water tower with views of the River Alde
-
More clouds gather over renewable energy trusts – is there any hope for the sector?The outlook for renewable energy trusts has gone from bad to worse this year, with the industry being caught in a 'perfect storm'
-
Should ISA investors be forced to hold UK shares?The UK government would like ISA investors to hold more UK stocks – but many of us are already overexposed
-
Why Scotland's proposed government bonds are a terrible investmentOpinion Politicians in Scotland pushing for “kilts” think it will strengthen the case for independence and boost financial credibility. It's more likely to backfire
