Buy into residential property

Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: David Gibbins, fund manager, Hearthstone Asset Management.

The Rugby World Cup is less than a year away. Like most England fans, I have pondered the reasons for the amazing success of the England team in 2003.

Their manager, Sir Clive Woodward, always said that it was based on finding small, incremental gains across the board that ultimately meant the difference between success and failure.

This attention to detail is vital within the residential-property industry too, so it’s unsurprising that the most successful management teams display similar characteristics. Hearthstone is a specialist residential fund manager.

We aim to generate long-term returns from residential property in the UK. Flats and houses make up the bulk of the portfolio of our TM Hearthstone UK Residential Property Fund, but it also occasionally invests in housing-related equities. So which stocks in the sector do we currently find most interesting?

The first is Berkeley Group Holdings (LSE: BKG). The group CEO, Tony Pidgley, has an enviable track record of accurately calling turns in the residential market. He typically hoards cash and mothballs developments ahead of falls in the market, and then uses the funds to buy assets at a discount afterwards.

Berkeley has adapted its strategy significantly over the years, most recently turning to developing complex brownfield sites and creating sustainable communities. This business is financially cautious and we feel the management team will be further strengthened by the imminent return of Richard Stearn, previously financial controller, as finance director.

High visibility on earnings and clear commitments to shareholder returns also make this an attractive income stock – it currently yields around 8%.

As with several other housebuilders, the shares are somewhat unloved – they have fallen by around 25% since peaking in February 2014, as analysts believe that the easy money has already been made from the sector.

There may be some truth in this, but investors had to take far greater risks to enjoy these earlier gains, whereas Berkeley now remains a quality medium- to long-term investment.

Another strong player in the sector is Galliford Try (LSE: GFRD). Linden Homes, its housebuilding arm, has a partnerships division that builds affordable housing, which presents a significant opportunity for the group. The construction division is heavily involved in public-sector projects.

Capacity here has been boosted by the acquisition of Miller Construction in July this year. The business has minimal debt, rising profitability and a progressive dividend policy. The yield of 4.5% is covered 1.8 times.

A lesser-known player is Hansteen Holdings (LSE: HSTN), which specialises in regional light industrial property in the UK and Europe, an area that is typically rather neglected by the larger UK and European property firms.

The joint CEOs, Morgan Jones and Ian Watson, have specialised in this type of property for many years, typically buying assets with high rental voids and poor asset management, then improving rental cash flows and occupation rates by imposing rigorous management.

They have a disciplined approach to sales and acquisitions and support a progressive dividend policy. The current yield of around 4.7% is covered 1.7 times.

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