Liberum sees value in housebuilders after sector subsidence

Broker Liberum has upgraded housebuilders Barratt Developments and Persimmon to 'hold' as it toned down its caution on the sector, but said Taylor Wimpey remained a 'sell'.

Having turned cautious on housebuilders in November due to stretched valuation and fears of margin pressure, Liberum noted the sector's shares had since subsided 13% due to worries about Brexit and prime London property.

While margin pressure remains a threat and not all Brexit risks are priced in, the broker sees valuations as "much more accommodating" now.

"We think the sector would now rally on a Remain vote, but may fall further if rates rise and GDP slows in the event of a Leave decision. Weakness in prime London is unlikely to ripple out in the absence of a hard Brexit, but affordability is still a constraint to house prices."

On a company basis, while the recent weakness in Persimmon’s sales rates was said to be worth monitoring, the shares' strong underperformance no longer leaves much downside.

Liberum's top picks are Bellway and MJ Gleeson, both rated 'buy' as they "should achieve faster growth than peers".

Bellway's rapid volume growth should be enough to maintain profit growth in spite of margin pressure, with the market's overly caution on its London exposure, the broker said.

Even after its strong sector outperformance, Gleeson is liked as its growth prospects "appear very strong and it has yet to experience much help at all from rising house prices".

Redrow has also been raised to 'buy' as its valuation also now looks "interesting" after major underperformance.

With most exposure to upmarket London, Berkeley was kept at 'hold', with its risks felt to be much more balanced after underperformance and potential for a bounce if Brexit is averted, with Bovis on the same rating and looking "very cheap" but balanced by the need for evidence that costs are back under control.

On Taylor Wimpey, analysts are "more cautious than most on the evolution of margins and returns", while the shares have performed relatively well.