Housebuilders subside as Deutsche Bank slashes targets due to Brexit

Deutsche Bank cut its price targets for all UK housebuilders in light of Brexit uncertainty, although the bank continued to be positive about the sector.

Barrett Developments' target price was cut to 575p from 667p; Berkeley to 3,829p from 3,981p; Bovis to 1,190p from 1,322p; Bellway to 2,649p from 2,736p; Crest Nicholson to 514p from 542p; McCarthy & Stone to 215p from 256p; Persimmon 2,072p from 2,473p; Redrow to 495p from 497p; and Taylor Wimpey to 218p from 261p.

Deutsche reduced its forecasts for the sector as it saw moderate downside with volume and house prices falling 10%, though it believes the sector will be shown to provide value.

“Reflecting Brexit uncertainty we have reduced our forecasts for the UK housebuilders to reflect a possible moderate downside scenario (-10% in volumes and pricing), in a bid to prove that even with these assumptions the sector offers strong investment opportunities.”

The bank's new assumptions drove about a 50% reduction in estimates for earnings before interest and tax (EBIT) and about a 60% reduction in profit before tax in 2017.

However, Deutsche forecasted the sector to achieve an average 15% return on capital employed, which is well above the comparable 10% approximate cost of capital pre-tax.

Housebuilding had been a policy issue of the UK government since 2007 as it is a driver of economic growth. The government reiterated this after the UK voted to leave the European Union on the 23 June and its target was to build 1m homes by 2020.

With this in mind, analysts said they see government policy support as a key upside risk in the housebuilding sector.

“The key policy which could provide upside we believe is Help to Buy equity loan where we believe a temporary increase in the equity stake taken by government to 30% (still remaining short of the 40% in the London Help to Buy product) could provide meaningful support to volumes, as could a short term stamp duty holiday at the lower end of the house price scale”.

Data released on Tuesday from the British Bankers’ Association showed mortgage approvals in June were down 23% compared to the month before, which along with the target price cut from Deutsche bank, helped push the share price of the UK’s leading housebuilding companies down on Tuesday.

Among the FTSE 100 operators, shares in Persimmon were down 1.32% to 1606.44p, Barratt's 2.51% lower to 408.50p, Taylor Wimpey down 1.57% to 146.76, and Berkeley down 1.94% to 2,576p at 1120 BST.