UK Housing Market Slowdown Hits Builders

The FTSE 100 edged higher on Tuesday, but the housing sector was hit hard by concerns about the Brexit uncertainty. Leading shares climbed slightly, after positive news from BT and GKN helped the index, but housebuilders have continued to decline. The Brexit vote hit the UK economy hard, and some of the UK’s biggest cities have seen demand for housing fall sharply.

UNDEFINED - Tuesday, July 26, 2016

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Analysts at Deutsche Bank slashed their price targets for UK housing companies, but overall they remain positive about the sector, noting that even with the assumptions they have made about the sector, there are still some strong investment opportunities.

Deutsche Bank said that their new analysis has led to a 50% reduction in their EBIT estimate, and a 60% reduction in expected profit before tax for 2017. Despite this, they expect that the sector will show an average return on capital employed of approximately 15%, which is far better than the comparable 10% cost of capital pre-tax.

Government policies will be important for the sector. Since 2007, new housing developments have been key factors for the UK government, and have identified it as driving economic growth. The government has targeted 1m new homes to be built between 2015 and 2020, and this is still an important goal even now, post-brexit. The Help to Buy equity loan could be an important driver for the sector, as could the potential for a short-term stamp duty relief at the lower end of the pricing scale.


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