Investment Insider: How can you ride the house price wave?

It's not only the builders that stand to stage a recovery

Regardless of the arguments over the rights and wrongs of government-subsidised mortgage schemes, the simple truth is that the housing market is linked to the health of the economy.

Companies connected either directly or indirectly to the housing market are commonly referred to as cyclical stock. In other words, when the economy does well, these companies tend to do well. But when it is in the doldrums, these companies tend to perform less well.

Since the collapse of Lehman Brothers (which now seems like an eternity away) and the subsequent sovereign debt crisis in the eurozone, the housing market has unquestionably been adversely affected. This is primarily because of reluctance by banks to put their money on the line by lending to prospective homeowners. But there are signs that a recovery in lending is under way, thanks in part to government initiatives to absorb some of the risk. It is also because banks are feeling more optimistic about the future.

It should be said that even without the boost from the government, housebuilders entered the economic down cycle by battening down the hatches, slashing debt and focusing on margins rather than flooding the market with affordable homes. They adjusted quickly to the credit-strapped economy by directing resources at the more expensive end of the market, where activity remained buoyant. After all, why would housebuilders build cheaper houses that they can't sell?

Thing is, the market has, to some extent, already priced in a recovery for housebuilders. Shares in many construction companies have risen quite substantially since 2011. For instance, shares in Barratt Developments that only cost around 94p in 2011 would set you back 300p today.

On the face of it, shares in housebuilders look to have recovered significantly. As a group, though, housebuilders are still only valued at around 12 times earnings, which does not look expensive. What's more, the market is expecting profits at many housebuilders to rise significantly over the next couple of years. For instance, profits at Taylor Wimpey are expected to improve 40 per cent this year and around 26 per cent the year after. If the forecasts for UK housebuilders pan out as expected, their current valuations would look quite modest.

Buying shares in housebuilders could be one way of investing in a housing recovery. But there are other ways of benefiting from a real-estate revival. Travis Perkins is a supplier of materials to the building trade. Performance at the company has been affected by the economic slowdown. In 2009, profits fell around 15 per cent but have rebounded since. Profits this year are expected to rise around 5 per cent and a further 10 per cent in 2014.

Real-estate agents may be worth looking at too, given that wherever there is a housing transaction an estate agent is unlikely to be too far away. Some of the more interesting players include M Winkworth, Countrywide and Savills. The latter is not only a play on the UK property market but also has an international network of more than 500 offices and associates. Half its turnover is generated in the UK and 40 per cent from the Asia Pacific region. That might explain its resilient performance in the face of an economic slowdown in the UK.

David Kuo is director of fool.co.uk

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