Homebuilders in the U.K. are seeing huge profits lately. The new building sector is growing at lightning speed, and investors are following to collect the dividends.
Due to the government’s stimulus, the housing market has improved in the U.K. Markit, which provides financial information services, predicts there will a 90% increase in dividend payouts, which will total as much as 285 million pounds (roughly $445 million) this year.
There are three reasons for this hike:
There is a Help to Buy scheme available. This will provide 20% of the purchase price interest free for five years, as long as it’s under 600,000.
The government is encouraging banks to lend money to home buyers using a rebate.
Chief economist, Savvas Savouri believes the U.K.’s population will be larger than Germany’s by 2045. These people will need a place to live, so logically there will be a great demand for homes.
The housing markets in affluent areas are growing the fastest. According to location analyst CACI, there is an acceleration of homes being built in affluent areas because there is a demand in these premium areas, particularly in the South East.
Since homes in these affluent areas are sold for much more, and since they are being built at three times the rate of homes in affordable areas, profits are higher. And this, in turn, is yielding higher dividends for investors.
How the U.S. Compares to the U.K.
Many people believe the U.K. usually follows the path of the U.S., but that doesn’t seem to be the case now. The U.S. has seen a significant decrease in new home sales in recent months. Since May 2013, new home sales have decreased 33%.
Mortgage rates have risen with the improvement in the housing market. Home buyers are reluctant to dive into new homes now because with the higher rates, there will be higher payments. And home prices are rising too, which is making the new housing market less affordable.
Along with this, home loan rates are expected to continue to increase once the Federal Reserve begins to taper its $85 billion bond buyback program.
What Investors Should Do Now
With the U.S. housing market slowing down, it only makes sense to turn to the U.K. MarkIt expects that FTSE350 homebuilders will see a £285 million payout, which is £150 million more than what it was last year.
Bellway (LSE: BWY), Bovis Homes (LSE: BVS), and Berkeley Group (LSE: BKG) are also expected to see substantial gains, with the highest dividend increases from Bellway and the best yields from Berkeley Group. Berkeley Group may see yields at 5.3%, which is a hike of 35%. By June 2015, the company should be making cash dividends of about £471 million.
If you’re looking for less risk, you may want to consider ETFs. ETFs diversify your portfolio because you invest in many assets across a broad range of companies. The best housing ETFs to invest in right now are:
SPDR S&P Homebuilders (NYSE: XHB) – This fund has an asset management of $1.9 billion, with trades of about 6,000,000 shares each day. It is made up of 25% homebuilders, 20% household appliance securities, 29% specialty retail stocks, and 26% companies related to building materials.
iShares Dow Jones US Home Construction (NYSE: ITB) – This ETF’s assets are $1.72 billion, with around 3,000,000 shares traded a day. It’s largely made up of top ten holdings, with 12% in large cap securities.
PowerShares Dynamic Building & Construction (NYSE: PKB) – This fund holds over 30 companies. Construction makes up 27%, and building materials is 15% of the ETF. Its assets are on the lower side but still quite good at $98.6 million. It has fewer top ten holdings included than ITB but more large cap securities.
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If you’re more interested in investing in individuals stocks, consider:
Lennar (NYSE: LEN)
Pulte (NYSE: PHM)
DR Horton Inc. (NYSE: DHI)
It’s important to note that not only are homes being built in both affluent and affordable housing areas, but the prices of homes in both areas are rising. According to Halifax, housing prices have risen 5.4%, with the average home price at £170,000. The peak of the housing market was in 2007, which was £200,000.
This is being brought to your attention because there is still a lot of room for growth in the housing market AND increases in house prices. By putting these two factors together, an investment in the U.K. housing market could be a very good move.
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