This stock is primed to benefit from Britain's chronic housing crisis

Telegraph

5 days ago

Questor is The Telegraph's stock-picking column, helping you decode the markets and offering insights on where to invest.
The global financial crisis wreaked havoc on housebuilders. Even in its aftermath, a hugely uncertain economic outlook meant that very few investors considered allocating capital to the sector.
However, in the following years, housebuilders such as Persimmon generated exceptional returns as their operating conditions improved and the wide margin of safety previously applied to their market valuations gradually dissipated.
Now, the company and its peers face a somewhat similar, albeit less extreme, situation. Persimmon's share price has slumped by 58pc in the past four years, with it now trading on a rather modest price-to-book ratio of 1.2. Although it faces an uncertain near-term future that is likely to dissuade many investors from buying it, the company's long-term prospects are becoming increasingly upbeat.
Interest rates, for example, have now fallen by 100 basis points since last year's peak. Yet their impact has not been fully felt due to the existence of time lags. When combined with the prospect of further monetary policy easing, with inflation due to gradually fall to 2pc over the medium term, demand for housing is likely to significantly increase as mortgage rates fall, wage growth gathers pace and prospective buyers look ahead to a more buoyant economic period.
Furthermore, the longstanding imbalance between housing demand and supply has arguably worsened since the global financial crisis. Housing starts in 2024, for example, amounted to roughly 132,000 units. This is 26pc lower than the previous year's figure and is 5pc down on 2010's total.
Given that the UK's population is forecast to increase by around 490,000 people per year between 2022 and 2032, demand growth is likely to continue to outstrip increases in supply. This could result in housebuilders such as Persimmon enjoying higher volumes and increased average selling prices that together bolster its financial performance over the coming years.
The company is well placed to capitalise on an upbeat outlook for the UK housing market. Its recently released trading update for the period from the start of the calendar year to 27 April showed that its land bank increased by just over 2pc to 83,800 plots. It also has a net cash balance of around £259m that puts it in a strong position to overcome potential short-term challenges while continuing to invest for long-term growth.
The firm's trading update additionally stated that it remains on track to deliver a 6pc rise in completions for the full year. Average selling prices, meanwhile, were up 4pc during the period. The company is currently forecast to generate a 10pc annualised rise in earnings over the next two financial years. This further suggests that its shares remain undervalued following their decline over recent years.
Clearly, there is a very long road to recovery for Persimmon's share price. Indeed, it is currently down 53pc since Questor tipped it as a 'buy' during October 2017. In doing so, it has lagged the FTSE 100 index's performance by 66 percentage points.
Since our initial recommendation, of course, the company has paid generous dividends. In fact, our income return amounts to 42pc. This means that, on a total return basis, we are down a far more modest 11pc.
While still hugely disappointing, this highlights the stock's income potential over a sustained period. Given that it has a dividend yield of 4.5pc at present, with shareholder payouts covered a healthy 1.5 times by earnings last year, the company remains a highly worthwhile income investing opportunity for the long term.
In the short run, Questor would be unsurprised if Persimmon's share price exhibits heightened volatility. While inflation is set to fall to the Bank of England's target over the medium term, the central bank anticipates it will rise to 3.7pc later this year. This will almost inevitably prolong the process of monetary policy easing, which means investors in the housebuilder will need to be patient.
In the long run, though, they are likely to be handsomely rewarded. The company's solid balance sheet, attractive market valuation and upbeat operating outlook mean that it offers significant return potential over the coming years.