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House building sector putting market in the shade

27th August 2004 | back to article listings BACK    print this article PRINT

A UK Equity fund manager is advising people to buy house builders rather than houses, following another drop in housing market activity.

The latest monthly RICS survey of housing market activity may have reported another fall, but the share prices of house builders have risen sharply.

"The house building sector has been out of favour for the last four months," says Derek Mitchell, UK Equity fund manager.

"But the point is that these companies are now far more resilient to a fall in house prices than they were a decade ago."

The sector, which traditionally under-performs in the second and third quarters, has responded to the rise in interest rates, and the Monetary Policy Committee's cautious comments concerning an end to the housing bubble.

However corporate results are still looking strong. For example, Berkeley Group's decision to exit its traditional house building activities and return cash to shareholders has reminded investors of the hidden value that exists in this area.

Additionally, Persimmon's strong growth and recent announcement that its strong balance sheet warranted company expansion has re-focussed attention on the potential for further M&A activity.

"We believe housing share prices have further to rally and are a better bet than being a house owner at the moment," concluded Mr Mitchell.

"Valuations are cheap and the sector's dividend yield is over 4 per cent."

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