Berenberg points out value in UK housebuilders

25th Jul 2018 10:31

(Sharecast News) - Berenberg initiated coverage of a host of housebuilders on Wednesday at buy' and 'hold' ratings, after the sector has endured a tough 2018 and with shares down 16% amid concerns about cooling house price inflation and rising build costs. Taylor Wimpey, Redrow, Bovis and Bellway were started at 'buy' by analyst Sam Cullen, while Persimmon, McCarthy & Stone, Crest Nicholson and Berkeley were started at 'hold'.The share pullback leaves the sector trading at 1.4 times 2019 tangible net asset value, a 29% discount to recent history, with a 7% yield."In our view, these fears are overdone: the macro outlook remains supportive; housing is still affordable in most regions of the UK; and, with the support of the government's Help to Buy (HTB) scheme, we expect the new build sector to continue to outperform the wider market."Cullen says as homeownership is a key UK political battleground, he expects HTB to be extended. Even if this is with caps on prices or income, he expects little impact on overall demand. Furthermore, he points out that lower land prices and better margins have been a feature of the recovery, as better land-buying terms since publication of the National Planning Policy Framework (NPPF) have resulted in increased pull-through of higher-margin strategic land, while the major builders' increased focus on value over volume has reduced competition for open-market land."With half of local authorities still lacking a sound housing plan, and 90% of those with plans in place likely to review them in the next three years, the outlook remains positive."The analyst also see "significant downside risk protection", with a number of factors that make this cycle less pronounced than the last."The Mortgage Market Review (MMR), issued by the UK's Financial Conduct Authority (FCA) in 2014, has taken the heat out of the mortgage market, limiting the issue of high loan-to-income (LTI) mortgages. ""Low rates mean that affordability (if the buyer has a deposit) remains at near all-time highs, with significant capacity to absorb both further price increases and rate rises insulating against the build cost inflation that is apparent nationwide."Lastly, balance sheets are much healthier: whereas the top seven builders started 2008 with £3.7bn of net debt, they ended 2017 with net cash of £2.9bn, and we believe there is significant (£10.6bn) further cash generation to come."