Investment Insider: Lending outlook suggests recovery for housebuilders

It seems reports of the death of the housing market may be an exaggeration. According to the Council of Mortgage Lenders, gross mortgage lending in May climbed 13 per cent from a year earlier and 24 per cent on April.

Most people still want to own their homes – or, at least, need somewhere to live. This is why housebuilders could be a good investment bet. That said, the fortunes of housebuilders are closely linked to the economy's health, with profits rising and falling in sync with the ups and down of the credit cycle.

There have been signs recently that credit may become more available and more affordable when details of the Government's Funding for Lending Scheme are fleshed out. However, even without this welcome boost, some builders have already reduced debt and started focusing on margins rather than cranking up the volume.

In some cases, housebuilders' shares are selling below their fundamental valuations. Put another way, their assets are worth more than their current share price.

Consider Persimmon, the UK's biggest housebuilder. At 590p, its shares are valued at a smidgen below its book value. In December, it reckoned it had about 63,000 plots representing over six and a half years' supply of houses. But Persimmon is so confident of converting those plots into homes that it has outlined a plan to return about £1.9bn in dividends to shareholders over the next nine years.

Other housebuilders whose share prices are below their intrinsic value include Barratt Developments, Bellway, Bovis Homes and Redrow.

A property investment fund may be another way to capitalise on a recovery in the housing market. Hearthstone has been authorised to launch the UK's first regulated residential property fund. It plans to track the Acadametrics House Price Index by investing in private rented housing across the UK. The initial portfolio is expected to be worth £30m with seed funding from builders and developers. The fund's target size is £250m.

David Kuo is director of financial website fool.co.uk

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