Berenberg downgrades raft of housebuilders, upgrades Berkeley

Berenberg reviewed its ratings on a host of UK housebuilders on Monday as it warned that 2023 will likely be the toughest operating environment for the industry since the Global Financial Crisis.

"We think that there will be a combination of negative headwinds emerging simultaneously," it said.

"Firstly, we expect the companies in the sector to endure significant margin erosion as we think that price growth (0%) will lag build cost inflation (5%). The most significant driver of this reduced pricing power will be a decline in affordability as we think that the combination of higher mortgage rates and cost-of-living increases will mean that mortgage costs increase to 50-55% of an annual salary, on average, compared to the 20-year average of 36%.

"Furthermore, the end of the Help to Buy scheme - which has provided significant support for first-time buyers - as well as the spectre of rising unemployment, will act as a drag on price and volume momentum."

The bank downgraded Barratt Developments, Bellway, Crest Nicholson, Persimmon, Redrow, Taylor Wimpey and Vistry to ‘hold’ from ‘buy’.

Berenberg upgraded Berkeley Group to ‘buy’ from ‘hold’, saying it believes that it can meet its mid-term profit guidance, that it offers upside risk on capital returns and it is strategically very well positioned.

The bank maintained its ‘buy’ on MJ Gleeson, saying it thinks the company will deliver a structurally higher growth rate, alongside its better pricing power versus its peers given its historic under-pricing of the product.

"In general, we have a broadly neutral view of the UK housebuilding sector," it said.