With March’s Budget the government threw a £3.5 billion stone it hoped would clear two items from its growing list of problems in one policy. The Help to Buy scheme was cast to remove the barriers that were preventing first-time buyers from stepping onto the housing ladder, while at the same time stimulating activity in the construction sector.

Under the loans programme, a buyer hoping to purchase a newly built home will be able to take out a mortgage for just 75% of the cost of the property, provided they can stump up a 5% deposit. Those who qualify will be eligible for an equity loan worth up to 20% of the value of the dwelling, funded by the Government, which will be interest-free for the first five years.

This scheme will run for three years from 1 April but chancellor of the exchequer George Osborne intends to launch the second phase of the policy from next January. A £12 billion mortgage guarantee scheme will be opened to buyers of all properties, not just newbuild ones, with a 5% deposit. The government will guarantee a proportion of the home loan as long as the home is priced at less than £600,000.

The Treasury, new Bank of England governor Mark Carney and the chancellor himself are all taking pains to stress there is no danger of a fresh housing bubble. That remains to be seen and although the policy does rather fly in the face of the Government’s desire to rebalance the economy toward manufacturing and exports and away from consumption, investors can only play with the cards they are dealt. If the Government is determined to fuel a housing boom, either out of economic necessity or political expediency, with a general election barely 18 months away, then there should be investment opportunities aplenty.

Housebuilders should continue to make the most of the first phase of Help to Buy, as volumes and prices rise, while estate agents and land developers are in pole position, too. The second leg will broaden the potential list of beneficiaries to suppliers of furnishings, household appliances and real estate-related services.

Our picks for capitalising on the nascent housing recovery cover a broad spectrum of the market. We include two traditional housebuilders, Berkeley (BKG) and Redrow (RDW), for their London exposure, strong earnings momentum and cash return potential. Estate agency and related services group Countrywide (CWD) looks another sensible pick, while Belvoir Lettings (BLV:AIM) is set to benefit from an improving rental market as it expands its network through acquisitions funded by the £6.2 million raised when it joined Aim in early 2012. Our top-of-the-range consumer goods play is premium branded cookers manufacturer AGA Rangemaster (AGA) while high-end interior furnishings outfit Walker Greenbank (WGB:AIM) still generates 60% of its sales in the UK and Dunelm (DNLM) is a homewares market leader.

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Safe as houses

When the chancellor of the exchequer unveiled the Help to Buy scheme alongside the Budget (20 Mar), it was seen as a variation on the theme introduced by earlier schemes such as First Buy and New Buy, but the expansion of the programme due in January 2014 could take the project to a whole new level. Housebuilding stocks have rocketed in acclamation of the policy initiative and investors must now ask themselves whether likely earnings forecast upgrades will be enough to carry higher a grouping of stocks which is already trading on multiples last seen at the peak in 2006, at least in terms of price to net asset value (NAV).

Looking at the most recent figures from the three key indicators for the housebuilding business - construction activity, mortgage approvals and house price inflation - it is easy to see why brokers like Peel Hunt feel able to predict that ‘barring a major u-turn by the government on Help to Buy, we believe this upturn could well last for five or six years.’

Construction activity. The jump in the Markit Construction Purchasing Managers’ Index (PMI) from 51 to 57 in July took the indicator to its highest level since June 2010 and an ongoing surge in housebuilding was a likely contributor here.

Mortgage approvals. According to the Council of Mortgage Lenders, mortgage approvals reached 68,200 in the second quarter, the best figure since the equivalent period in 2007. A survey published by the Royal Institution of Chartered Surveyors (RICS) (13 Aug) revealed home buyer activity had reached a four-year high in July. Encouragingly this was not limited to London either as the West Midlands and North East showed the greatest improvement in activity.

House prices. The picture is equally unambiguous here. The Nationwide reported (2 Aug) that house prices rose 0.8% in July, which the building society characterised as robust and held up well as further evidence of an upturn in the housing market. This was the largest monthly rise for 2013 and put year-on-year growth at 3.9%. The Halifax House Price Index (6 Aug) showed a 0.9% increase for July, also equivalent to a 3.9% year-on-year gain, the strongest rate of annual price growth since August 2010. This week’s RICS survey stated prices have just risen at the fastest rate in seven years.

The quoted housebuilders have nearly all cited Help to Buy as a stimulant to demand since 1 April, and each has flagged rising visits, sales volumes and order books. Persimmon (PSN) saw a 5% rise in visitors in the first quarter and a 19% leap in the second. ‘There has been a noticeable pick up since 1 April,’ says chief financial officer Mike Killoran. ‘Help to Buy is reminding the UK public there is affordable housing. It’s persuading people to come in to sites, although we are seeing good increases in unassisted sales too. People were put off by 2008 and the recession and they sat on the sidelines. Maybe we’re now seeing a bit more confidence.’

Improvements in prices are evident too and this is meat and drink to such operationally geared businesses, especially those who bought land shrewdly at the trough of the cycle five years ago. The Government may be stoking demand but planning issues still restrain supply. ‘Building activity is still subdued - in the first quarter housing completions in England were down 8% compared to the same period of 2012 and around 40% below the average number of quarterly completions in 2007,’ warns Robin Gardner, chief economist at Nationwide.

At your service

Even as they wrestle with Section 106 planning obligations, housebuilders look primed to deliver rapid earnings growth in the next two to three years, and certainly enough to keep momentum fans happy.

Yet other areas should also benefit from increased demand for new homes, notably the land development, estate agency and letting businesses. Sheffield’s Henry Boot (BHY) is well placed here via its Hallam Land arm, while Newcastle-based Grainger (GRI) builds residential properties, is active in the rental market and manages such properties for private landlords. It owns £2.2 billion of residential property, 84% of which is in the UK where it manages 18,500 dwellings.

Other companies capable of boosting their earnings as the housing market gathers steam include our picks Countrywide and Belvoir Lettings, as well as LSL Property Services (LSL). All three have acquired and invested through the downturn to ready themselves for the eventual recovery.

LSL Property Services’ acquisition spree has boosted its portfolio to more than 500 branches across the country, strengthening its Reeds Rains, Marsh & Parsons and Intercounty brands among others. The £486 million cap’s sales and lettings operations should thrive, while its additional surveying and brokerage services should generate additional income growth.

Following the same buy-and-build model is property franchiser Belvoir. Its agencies could well be boosted by a rise in buy-to-let purchases. Buy-to-let accounted for 13.3% of outstanding mortgage lending in the UK by the end of June, up from 13% in the final three months of 2012 according to the Council of Mortgage Lenders. Of the UK’s 11.2 million mortgages, some 1.4 million are buy-to-let.

London is a key rental market. Some 50% of residents live in such accommodation and prices are rising due to a supply and demand imbalance, which could tempt many to buy a house as an investment. The value of prime London housing has increased by 18% this year or £500,000, according to estate agent Savills (SVS). The average cost of a prestigious home in areas such as Belgravia and Fulham is now £3.2 million.

Home comforts

Newbuild is important but the transactional market is so much bigger, especially in terms of its secondary impact, as consumers often buy new appliances or furnishings when they move house. One name to note therefore has to be Kingfisher (KGF). Last month (24 July), the £9.3 billion cap behind brands including B&Q, Screwfix and Castorama posted a strong second-quarter update, reporting better-than-expected group sales up 5.2% and like-for-like sales 2.5% ahead over the 10 weeks to 13 July. This included a like-for-like sales rise of 2.5% in the UK & Ireland.

Yet Kingfisher has substantial exposure to Europe, which is still mired in recession. Following a big cyclical rally in the stock, the shares trade on almost 17 times consensus earnings of 23.3p, so any forecast miss might be harshly punished. Home Retail (HOME) is another potential winner from a property buying boom, since it sells everything from kitchen accessories to flooring and garden furniture. Yet Shares is wary here, too, as toys-to-consumer electronics arm Argos is its biggest business and margins remain under pressure.

We also fear a robust recovery is already priced in at Carpetright (CPR) and Topps Tiles (TPT) and while its valuation does not look like an outright bargain, its superior competitive position may mean Dunelm is a stronger option. A leader in the £11 billion UK homewares market with a strong management team and balance sheet flush with cash the company may well supplement strong earnings growth with chunky cash returns to shareholders.

A housing market boom should play to the strengths of household goods manufacturers ranging from high-quality carpets company Victoria (VCP:AIM), which lurched into the red last year, to ceramics maker Churchill China (CHH:AIM) and one of Shares’ preferred picks Walker Greenbank.

A housing market recovery on home turf as well as in North America and Europe, is positive for AGA Rangemaster. The premium consumer brands business has soldiered on amid low housing transaction levels and weak consumer confidence since the financial crisis struck five years ago. Yet its latest trading missive (1 May) suggested AGA was beginning to regain its swagger, as the company flagged a pick-up in orders for its internationally-beloved kitchen appliances and interior furnishings. These are spearheaded by iconic British cast iron ovens brand AGA and leading range cooking name Rangemaster, whilst its family of brands also includes luxury tiles-to-bathroom furniture brand Fired Earth, sofas-to-sideboards maker Grange, as well as luxury refrigeration name Marvel. Rising appliance sales are expected this year as homeowners move and look to remodel, assisted by Government schemes to increases mortgage availability.

Branded homewares firm Portmeirion (PMP), whose heritage homewares brands are Portmeirion, Spode, Royal Worcester and Pimpernel, is another primed to profit from resurgent housing market transactions in the UK. Sales should get a boost from the birth of Prince George of Cambridge and web-based sales continue to strengthen too. The interim figures were disappointing (1 Aug) as profits fell 38% to £900,000 in the seasonally-slower first half, mainly due to an anti-dumping duty imposed by the European Union on ceramics imported from China. Yet Shares remains bullish about the £70.5 million cap, which may still achieve full-year profit forecasts. Freddie George, retail analyst at Cantor Fitzgerald, is sticking with his estimate of a 4% advance in profits to £7 million for a 47.7p earnings per share figure.

SEVEN HOT PROPERTIES

AGA Rangemaster (AGA) 101.75p BUY

Play the upwards share price momentum behind premium branded cookers manufacturer AGA Rangemaster (AGA) ahead of potential upgrades triggered by the housing market upturn. The Leamington Spa-headquartered firm’s consumer brands include iconic British cast iron ovens offering AGA, leading range cooking name Rangemaster and luxury tiles-to-bathroom furniture brand Fired Earth. In its latest trading missive (1 May), the £66.8 million cap flagged increased profits for the four months to 27 April, as cost-cutting more than offset sales declines. Order levels give grounds for optimism and the company’s operational gearing means returning confidence to the housing markets of the UK, US and Europe could drive upgrades, possibly as early as impending half-year results. Consensus estimates for 2013 point to £7.3 million in taxable profits and earnings per share (EPS) of 8.0p, ahead of 22% growth to £8.9 million and 9.9p respectively in 2014. Those figures put AGA Rangemaster on an undemanding prospective price/earnings (PE) ratio of 10.3 for next year while a return to the dividend list offers an additional rerating catalyst. (JC)

Belvoir Lettings (BLV:AIM) 162.5p BUY

Property management franchise Belvoir Lettings (BLV:AIM) is set to offer investors the ideal combination of momentum and income this year as the housing recovery moves in to full swing.

Consensus expects the £28.9 million cap to report a 64% rise in taxable profits to £2.3 million on a £5 million turnover for this year and figures of £3 million and £6 million for next. After the payment of a maiden dividend in 2012 worth 5.8p a year the distribution is expected to rise to 6.8p and then 9.1p, equivalent to a juicy 2014 yield of 5.6%.

A 2013 price/earnings ratio of 19.1 times may be no give-away but the powerful income and dividend growth should carry the shares higher as an improving rental market is supplemented by select acquisitions. Since its flotation in February 2012, Belvoir has expanded its network and key deals have seen it move in to or strengthen its position in the Staffordshire towns of Lichfield and Burton, as well as London’s high-end rental market, via the purchase of independent agency Aldine Honey & Company. Last month (31 July) the company added new properties in London, Shropshire and Ipswich to take its number of branches to 153. (MD)

Berkeley (BKG) £22.85 BUY

THE COMBINATION OF a high London and South-eastern exposure and a programme to return a large of slug of capital to shareholders means Berkeley (BKG) still looks attractive.

The shares have admittedly already done well but a forward price/earnings ratio of 13.1 times for the year to April 2014 is hardly excessive, especially as consensus estimates for 9% and 11% earnings per share growth for the next two years could prove conservative.

A prime landbank gives Berkeley a massive competitive edge, one that it will turn into cashflow and fat dividends for shareholders. Between 2013 and 2021 Berkeley intends to return £1.7 billion, or £13 per share, to investors. The first 15p payment was made in April and a further 59p will follow in September.

Such an ambitious plan does not mean boss Tony Pidgley is resting on his laurels. During the year to April 2013 Berkeley invested a further £315 million in new land, acquiring ten sites. Eight were in London, representing some 99% of the plots. A trading statement is due early next month (2 Sept). (SFl)

Countrywide (CWD) 600p BUY

Estate agency and related services group Countrywide (CWD) is set to report its first profit for two years as the housing market gathers pace.

The company is forecast to make £58.4 million of taxable profit this year ahead of a 59% surge to £93.1 million next. Such a rapid rate of progress, coupled with the potential for upside surprises, more than justifies the forward price/earnings ratio (PE) of 27.7 times.

The £1.3 billion cap went public in March to help fund the expansion of its business and it spent some £4.5 million on five letting agencies in the early part of this year. More deals are expected to follow. The firm has also opened several new branches, including four outlets in its Hamptons business and three new offices under its Countrywide brand.

Lower net debt and rising profits also give the firm ample room to pay dividends. Consensus is looking for payouts of 6.2p and then 9.6p. Although these equate to yields of just 1.0% and 1.6% the distribution should continue to grow rapidly. (MD)

Dunelm (DNLM) 988.5p BUY

Investors prepared to pay a full price for one of the retail sector’s highest-quality operators could ride the housing recovery via Dunelm (DNLM), a domestic leader in the £11 billion UK homewares market. The £2 billion cap is one of retail’s few structural growth stories, expanding throughout the UK via its Dunelm Mill-branded superstores, which remain relatively concentrated in the North West and the Midlands. Dunelm is also benefiting from the resonance of its ‘Simply Value for Money’ proposition, while the breadth and depth of its product range enable it to take market share from supermarkets and upmarket department stores alike. Online penetration of just 4.5% also implies there is more to come from investment in its multi-channel operations. Strong of balance sheet and with a pedigree in terms of capital returns, a forward price/earnings ratio of 24.6 times 2013 consensus earnings is demanding but Dunelm’s earnings momentum could well carry the shares higher. (JC)

Redrow (RDW) 248p BUY

Profits collapsed during the 2008-09 recession but housebuilder Redrow (RDW) is roaring back and it looks a good way to make the most of the Government’s plans to stoke a housing boom. Pre-tax income jumped 80% in the year to June 2012 and further advances of 24% and 39% are expected for fiscal 2013 and 2014 respectively.

These numbers should facilitate a return to the dividend list, too, and they could still prove conservative, especially since London represents a growing share of the group’s turnover. The volume of private reservations in the first half rose by 24% including the nation’s capital, although the figure was still an impressive 19% without it. The group has acquired 700 plots in London with a gross development value of £450 million.

The £928 million cap’s latest trading update (4 Jul) revealed sales for the financial year of £604.8 million, up 26%. Net debt of £91.1 million was well below market expectations and management noted profits will be above the top end of the range of analysts’ estimates when Redrow delivers full-year results next month (18 Sept). We would expect further upside surprises in the coming months. (SFl)

Walker Greenbank (WGB:AIM) 138p BUY

A resurgent housing market augurs well for luxury interior furnishings firm Walker Greenbank (WGB:AIM), the wallpapers and fabrics maker behind internationally-renowned brands Sanderson, Morris & Co, Harlequin and Zoffany. Although exports to Russia, China, Japan, Eastern Europe and the US offer premium growth prospects the £79.1 million cap still generates 60% of its turnover here in the UK. Walker Greenbank’s trusted relationship with leading home retailer John Lewis represents a key strength, as the department store operator is focusing on driving sales of British manufactured goods. Increasing consumer confidence and the entry of more first-time buyers into the housing market should prove especially beneficial for the company’s Scion range, an accessibly priced interiors brand aimed at younger customers, as well as its competitively-priced Sanderson Home offering. Based on WH Ireland’s 9.5p earnings per share estimate, the shares swap hands on a prospective price/earnings ratio of 14.5. That is reasonably undemanding given how a resurgent housing market could drive Walker Greenbank’s earnings momentum. (JC)