25th Nov 2022 10:26
(Alliance News) - Housebuilding stocks took a bit of a beating on Friday after German bank Berenberg said it is pessimistic about the sector's prospects.
Berenberg cut its sector-wide pretax profit forecast by 40% on average. What's more, it doesn't expect earnings to hit a trough until 2024.
"Indeed, we do not yet believe that company valuations are attractive enough for us to turn more positive on the sector and we maintain just two Buy ratings, primarily for stock-specific reasons," Berenberg said.
Its 'buy' ratings are for Berkeley Group Holdings PLC and MJ Gleeson PLC. It has 'hold' ratings for Bellway PLC, Barratt Developments PLC, Crest Nicholson Holdings PLC, Persimmon PLC, Redrow PLC, Vistry Group PLC and Taylor Wimpey PLC.
Berenberg estimated that consumer affordability issues will cloud over the sector. Berenberg said mortgage costs as a proportion of income have risen to 50%, "well above the 20-year average of 36%". It stood at 52% during the financial crisis, Berenberg added.
The German bank continued: "Indeed, if we make a cost-of-living inflation adjustment of GBP3,000, we think that this rate would spike to 55%. This rapid change in affordability remains the key driver of our cautious view on the sector.
"We have cut our base-case forecasts for the UK housing market and now model a 10% decline in volumes and a 5% decline in prices, spread over 2023-24. We still expect 5% build cost inflation in 2023. On this basis, we expect average sector margins to fall by around 800 basis points – from 20% to 12%."
Berenberg said its pretax profit forecasts for the sector are 7% and 16% below consensus in 2023 and 2024 respectively. The market might be "too optimistic" on the timing of the housing sector's recovery, Berenberg added.
In the FTSE 100, housebuilders sat towards the bottom of the index. Persimmon lost 1.0%, Taylor Wimpey was down 0.9% and Berkeley gave back 0.8%.
By Eric Cunha; [email protected]
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Related Shares:
Berkeley GroupMJGleesonBellwayBarratt DevelopmentsCrest NicholsonPersimmonRDW.LTaylor WimpeyVistry Grp