Liberum highlights Bellway, MJ Gleeson, Redrow as top housebuilder picks

The broker raised its earnings per share forecasts by about 10% for 2017 and 15% for 2018 as house price inflation expectations increase to 3% in 2017 and slow materially to 1% the following year, while economic forecasts improve.

But it is cautious on the housing sector, despite higher target prices due to recent share price gains.

It prefers growers who can offset expected margin pressure from house price inflation with volume growth to returners, such as Bellway, MJ Gleeson and Redrow.

Liberum upgraded Redrow to ‘buy’ from hold’ and raised its target price to 561p from 415p, while Bellway and MJ Gleeson were maintained at ‘buy’ with target prices of 700p and 3,032p, up from 662p and 2,780p, respectively.

However, Persimmon and Berkeley were downgraded to ‘hold’ from ‘buy’, although their target prices were raised to 2,161p and 3,169p, from 1,900p and 3,150p respectively, on valuation.

Barratt Developments remains Liberum’s least preferred stock with its rating maintained at ‘sell’ with a target price of 492p, up from 425p, as its short landbank makes its dividend less sustainable under stress than for the other returners.

The outlook of the British economy has shifted and Liberum claimed that economists are now more optimistic about 2017 and expect only a mild slowdown in 2018/19 with the rate of unemployment now anticipated to rise to only 5.3% in 2018.

Liberum also said that the macroeconomic environment remains uncertain, housing affordability “looks stretched”, and looks that way to the regulator too. It expects the government's Help to Buy scheme to face tests in 2018, but said it is likely to come through unscathed.

It also forecasts that any interest rate hikes would likely impact sentiment rather than the housing market, the build cost inflation is likely to persist and that the land market may become more competitive.

At 0822 BST, shares in Bellway were up 0.82% to 2,712p, MJ Gleeson was down 1.08% to 642.50p and Redrow was up 1.28% to 513.50p.

Persimmon was up 0.34% to 2,094p, Berkeley was down 0.6% to 3,915p and Barratt Developments was up 0.36% to 550p.