- Berenberg downgrades housebuilders
- Affordability to increase to 50% of income from 35%
- Medium-term the sector looks more attractive
UK housebuilders have had a difficult 2022 driven by fears of recession and higher interest rates impacting the sector. Year-to-date share price declines range from 25% at Berkeley (BKG) to almost 50% at Persimmon (PSN).
Investment bank Berenberg published a research note on Monday suggesting there is further pain to come in 2023 and therefore too early to go bargain hunting.
NEAR-TERM HEADWINDS
The bank reckons UK housebuilders will face cost build pressures of around 5% while price growth will lag, leading to margin erosion. A key driver of reduced pricing power will come from a decline in affordability.
This will come as a shock to most households because prior to the pandemic interest rates and mortgage costs have been consistently falling, leading to higher affordability.
The combination of increased cost of living expenses and higher mortgage rates are estimated to push up mortgage costs to between 50%-and-55% of the average annual salary compared with a long-term average of 35%, estimates Berenberg.
The end of the government’s Help to Buy scheme, which provided support for first-time buyers and the gloomy forecast of recession by the Bank of England is expected to act as a drag on housing transactions as well as price.
FURTHER EARNINGS DOWNGRADES
Working the numbers through its models, Berenberg estimates sector pre-tax profit to fall around 10% in 2023, which is 12% below the market consensus. If proven correct it means investors should expect further earnings downgrades.
It is difficult for shares to outperform in the face of consistent negative earnings revisions.
The news isn’t all bad. Looking beyond 2023 the bank believes there are reasons to be optimistic. A fall in land prices by at least 20% and potentially up to 50% will allow the sector to rebuild profitability. In addition, the sector’s balance sheet is in good financial shape which will allow decent returns on capital.
The investment bank downgraded seven companies of the nine companies in the sector to hold from buy on Monday. However, Berkeley was upgraded to buy while the buy recommendation on MJ Gleeson (GLE) was maintained.
