HSBC starts 10 UK housebuilders at 'buy'

HSBC initiated coverage of UK housebuilders saying the sector offers exposure to an area of real undersupply, with the UK government “largely pulling out all the stops to help”.

It started Barratt Developments, Bellway, Berkeley, Bovis Homes, Crest Nicholson, Galliford Try, McCarthy & Stone, Persimmon, Redrow, and Taylor Wimpey all at ‘buy’.

“In simple terms, for a sector that we predict in 2016 will be delivering an average 17% post-tax return on invested capital and a 20% return on equity, it instinctively does not seem right for it to be rated on an average 2016e price-to-earnings ratio of just over 10x with a 5% dividend yield.

“Indeed, by 2018 we estimate that some shares may offer dividend yields as high as 7%.”

HSBC said that in world concerned about oversupplied situations globally, this sector offers the reassurance of the long build-up of an undersupply of UK housing versus new annual household formations.

It expects this situation to persist unless, post a potential Brexit, the UK is unable to come up with sensible working visa arrangements, and the 3 million non-British EU nationals simply become unwelcome and depart en masse.

The bank’s key calls are Bellway for good value, Crest Nicholson for growth with income and Galliford for self-help.

As far as Redrow is concerned, HSBC said it was more positive than most, as the group’s strategy deserves a much higher rating than it is currently being penalised with.

On Bellway and Redrow, it said the current valuations are penalising them for not having as high a dividend payout as the others in the sector and look very overdone given the growth opportunities available.

In addition, HSBC pointed to the UK government’s numerous initiatives to help bridge the gap between supply and demand in the housing government, with Help to Buy being one of the key schemes.

It also highlighted the Starter Homes scheme and the Private Rented Sector initiative, which aims to increase investment by institutional investors in the PRS, where all the properties are built for rent, not sale.