Don’t write off housebuilders, investors urged

Share prices are heading south rapidly, but one analyst thinks that the selling is overdone. Here's why.

Housebuilder shares were floored by more heavy selling today as valuations continue to languish at levels last seen in the depths of the pandemic or after the Brexit vote.

The latest punishment for the likes of FTSE 100-listed Barratt Developments (LSE:BDEV) and Persimmon (LSE:PSN) reflected not just wider recession fears but Nationwide figures showing a slowdown in house price growth to a weaker-than-expected 0.3% in June.

Investors are now pricing the house market to crack under the weight of economic challenges, which is why shares are down more than 40% on their pre-pandemic level.

The de-rating has left the sector on just seven times forward earnings, something that has happened on six previous occasions since 2005.

Broker Liberum notes that shares went on to perform positively on all but one occasion, with an average increase of 26% over the following 12 months. It said the sector performed at least in line with the market in the five cases, with an average outperformance of 10%.

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Liberum said this week that it remains supportive of the sector and believes that macroeconomic challenges will slow rather than end the housing cycle.

It estimates 1% house price inflation in 2023, with the pressures created by the rising cost of living and higher mortgage rates offset by a shortage of stock for sale.

The broker’s view was echoed today by Nationwide chief economist Robert Gardner, who pointed to the low unemployment rate as another reason for the current resilience. Today’s survey showed that prices are 10.7% higher on an annual basis.

Liberum’s other arguments against a hard landing include expectations for much less forced selling than during the financial crisis, given that lending standards are much more prudent and more borrowers are on repayment loans with fixed terms.

It points out that less than 0.5% of mortgage lending is now to borrowers without evidence of income compared to 45% in 2007, while around 36% of lending is at a loan to value greater than 75% compared to 51% back in 2007.

The broker highlighted the potential catalysts for housebuilding valuations including a peak in inflation or rate expectations, M&A activity and enhanced shareholder returns.

It added: “The market may be forgetting that the sector is extremely well capitalised, with net cash of around 16% of market capitalisation.”

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Liberum has “buy“ recommendations on all housebuilding stocks in its coverage, with over 40% total shareholder return upside in eight of the nine.

The broker’s top picks remain Persimmon, MJ Gleeson (LSE:GLE) and Vistry (LSE:VTY), with price targets of 2,630p, 900p and 1,400p respectively. It sees value across the sector based on estimates for Barratt Developments at 690p, Bellway (LSE:BWY) at 3,040p, Berkeley (LSE:BKG) at 4,450p, Crest Nicholson (LSE:CRST) at 390p, Redrow (LSE:RDW) at 725p and Taylor Wimpey (LSE:TW.) at 165p.

Trading statements from the sector so far this year have bucked the stock market gloom, with Persimmon the next company due to update investors on 7 July before Vistry and Barratt Developments in the following week.