How to profit from Osborne’s attempt to re-inflate Britain’s housing bubble

The average home in the UK now costs £164,630, and although this is around 13% below the October 2007 peak, house prices in Britain remain overvalued by almost any historical measure.

Average UK house price: January 2000 to March 2013 (Click on the chart for a larger version)

Average UK house price: January 2000 to March 2013 (Click on the chart for a larger version)

Source: Nationwide House Price Index

According to the Nationwide Building Society the average UK home now costs £164,630. In nominal terms this is around 13% below the October 2007 peak, however adjusted for inflation prices are down 26.2%.

Property prices are already unaffordable for large numbers of people, particularly first-time buyers. The age of the average first-time buyer is 28-29, however, almost all of them are getting help from their parents and those that aren’t getting help are on average nearly 40. In addition, 46% of those buying a home for the first time are turning to shared ownership or shared equity in order to get on the property ladder.

The problem of house price affordability is not likely to get better anytime soon. In fact, given the fact that prices in many areas are rising and real household disposable incomes are under severe strain, property prices are likely to become even more unaffordable.

According to Nationwide, house prices were unchanged in March, however they rose for each of the previous five months. In the mean time, thanks to inflation and stagnant wage growth, the typical household is worse off. In just the five years since April 2007, the official cost of living has risen by 18%, while average annual earnings have risen by just 10%.

The solution to unaffordable house prices is to allow prices to fall, while also taking steps to boost wages and stamp out inflation. However, unlike in the US, house prices in Britain have not been allowed to come down to more normal levels. Instead, various steps have been taken to prop them up which is why the Economist describes UK property as the “unfinished bust”.

With the launch of the Help to Buy scheme George Osborne is once again doing his best to re-inflate Britain’s house price bubble, and he may well succeed. The question is, how can investors profit from Osborne’s attempt to re-inflate Britain’s housing bubble?

How to profit from rising house prices

The first and most obvious way to profit from rising house prices is to buy an investment property. This does however, require a serious commitment, both in terms of time, and in terms of capital, and even if you do your homework, it involves a considerable amount of risk. Not only does it take time to research the market and find an appropriate property, it’s not something you can do with just a few thousand pounds. Also should the market move against you, it could take weeks or even months to get out. For these reasons, and many more, this article focuses on somewhat simpler investment options.

The first is an investment in the shares of the homebuilders. Companies such as Barratt Developments Plc (LON:BDEV) and Taylor Wimpey plc (LON:TW) got hammered during the global financial crisis, with the latter falling more than 97%.

For three years following the bursting of the global credit bubble the two companies, the UK’s largest homebuilders by volume, went nowhere. Recently however, the outlook for the sector has improved and, both companies have entered a defined uptrend.

Construction companies in the UK are reporting increasing sales of new homes and higher average prices, which have resulted in improving profitability

Another London listed company that is showing signs of strength is Galliford Try plc (LON:GFRD), who’s Chief Executive Officer, Greg Fitzgerald, commented recently that, “We are very encouraged by what is happening [in the UK housing market]… The banks are sorting themselves out, and the government lending schemes are helping”.

Putting together a basket of UK homebuilders is one way to play rising home prices, however for those that are more interested in yield, real estate investment trusts, or Reits may provide a better option.

Reits, pronounced “reets”, are property companies that invest in rental properties and are listed on the stock exchange. These companies can invest in commercial properties such as warehouses, offices or shops, or residential properties such as flats or apartments.

Established in the UK in 2007, Reits offer investors a way to own property assets without buying them directly. They can also be traded cheaply and easily via an ordinary broker, and can also be held inside an ISA or a SIPP.

There are around 20 Reits listed on the London Stock Exchange however one that stands out is Londonmetric Property PLC (LON:LMP). The company is the result of a merger between London & Stamford Property plc (LSP) and Metric Property Investments plc (METP).

LondonMetric aims to “deliver attractive returns for shareholders through a strategy of increasing income and improving capital values”. The company invests in “Retail and Distribution” properties across the UK as well as in Greater London and it focuses on properties with enduring occupier appeal which provide longevity of income and the opportunity to improve rental values.

In February, shortly after the completion of the merger, the company announced that it was pursuing a number of opportunities to utilise its cash reserves to capitalise “on the spread between the cost of funding and property yields”.

At that time LondonMetric’s Chief Executive, Andrew Jones, commented that, “We are also looking at capitalising on our strong retailer relationships to provide real estate solutions in the distribution sector.” And last week the company acquired Primark’s main distribution centre in Thrapston near Northampton for £60.5 million. The 785,000 square feet warehouse is let to the retailer until 2032 at a cost of £3.9 million per year.

For the last twelve months the company has traded in a sideways range, however a dividend yield of 5.9% provides some downside protection, and stockbroker Oriel Securities has recommended that investors hold on to the stock for the income it provides.

The bottom line

I have no doubt that the people at will be right eventually. In the mean time however, there looks to be an opportunity to profit from the government’s policy of re-inflating Britain’s property bubble.

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