UK housebuilders’ sector retreats on broker’s rating downgrades

UK housebuilders were grounded at the bottom of the FTSE 100 on Tuesday after an influential analyst issued a rating cut on three of the sector’s biggest names.

Charlie Campbell, at Liberum, said the sector’s share prices were already looking stretched, and took the action before a likely margin squeeze, which he predicted would follow the combined pressure of “a more vigilant regulator” and the return of “build cost inflation,” particularly due to rising labour costs.

“The valuations of the largest housebuilders are too optimistic to withstand the gross margin pressure that we expect,” said Mr Campbell.

While he argued that rising interest rates “will not derail the housing market”, Mr Campbell warned of dangers posed by monetary tightening to wider sentiment, and not just from an increase in the UK.

“We believe investors may see the first US rate rise as a signal to reset portfolios. Housebuilders’ shares could also be vulnerable as returns-based models generate lower valuations as interest rates rise.”

The broker reduced its rating on Barratt Developments, Persimmon and Taylor Wimpey from “hold” to “sell”.

All three names appeared on the list of the biggest fallers on a marginally lower FTSE 100. Taylor Wimpey led the sector’s decline, falling 5.3 per cent to 187.7p. Barratt was 3.9 per cent weaker at 586.5p and Persimmon lost 2.4 per cent to £19.21.

Only Standard Chartered, which announced a $5.1bn rights issue as it reported a quarterly loss, made a bigger loss on the senior London index, retreating 6.7 per cent to 666p.

There was a similar pattern on the mid-cap FTSE 250 where Redrow fell 6.1 per cent to 442.5p.

Liberum cut its rating on Redrow from “buy” to “hold”. Although it left its rating on Bovis Homes at “hold”, the shares still fell and were down 3.8 per cent at 987.5p and Crest Nicholson fell 3.3 per cent to 534p.

Mr Campbell said he preferred “builders who can grow profits by raising output”, leaving his top picks as Bellway and Gleeson.

But there was no respite for Bellway, which lost 2.8 per cent to £25.26 in the sector’s general gloom, but Gleeson advanced 2 per cent to 500p.

Liberum also left a “hold” rating on Berkeley, saying it was “well set to grow” even as the company’s core London house market would slow.

Persimmon is due to issue a trading update on Tuesday, kick-starting the reporting season in the sector. Redrow’s annual meeting will be held on November 10 and Barratt’s trading update follows on November 11.

It is not the first time Liberum has issued influential comment on the sector. In February, it said the sector had “a wall of worry to climb”, as it reshuffled its ratings in the sector.

At the time, Liberum cut its 498p price target on Barratt, saying it did not see enough upside in the stock.