A bubble-proof housing investment?

There aren’t many places left to build houses in the southeast of England.

The green belt is no-go area unless you’re developing on a ‘brownfield site’, a previously developed site which is now empty. And there’s not much space left in the city itself. So supply is fixed, but demand just keeps on going up. That’s what’s driving house prices higher and higher.

Inland Homes (INL) is solving that problem. It has become an expert in brownfield sites – it buys unconventional sites in the booming southeast, obtains planning permission and prepares them for development – often selling the sites to mainstream builders at this stage. I think it could be a good way to invest in the southeast’s super-buoyant property market.

New homes on old land

A typical example of the way the company works is its current Drayton Garden Village project.

This is a 31 acre site in Middlesex, formerly RAF West Drayton, acquired from the Ministry of Defence. The MoD is Inland’s number one site supplier, so it has become used to dealing with the problems associated with old military bases.

The main issue at Drayton was diesel leakage. Inland Homes had to find a cost-effective way to decontaminate the soil. This process involves the use of biological organisms to solve an environmental problem. The existing buildings also had deep basements which needed removing. Asbestos is another common hazard on ex-military bases.

Because of the tricky and specialist nature of these problems, normal housebuilders just aren’t interested in taking them on. As a result, Inland is able to add a lot of value preparing the site, getting the necessary consents and putting in the infrastructure. These ‘oven-ready plots’ are then sold on for further development. And Inland moves on to the next project.

Making hay while the sun shines

Given the strength of the market in the southeast, though, the company is now retaining selected sites to develop itself and capture the builder’s profit margin.

Third party building contractors are being used for this, so Inland is keeping its headcount lean with only 25 employees or so. This should allow construction to be wound down quickly when the market becomes less attractive.

Even if we think London and M25 property is overheating, it’s hard to see it crashing without some completely unexpected interest rate moves. In any case Inland is opportunistic by nature. CEO Stephen Wickes told me he is focused on cash and doesn’t have a long term time horizon for the business in the way that a mainstream volume housebuilder might. So if the housing market does turn south, Inland Homes won’t be stuck with a pile of half-built homes and the debt to go with them.

The company’s shares have been very stable, stuck just below 50p for the last six months. As a niche play on the buoyant southeast market they look like they might be good value. Let’s keep an eye on this one.