Buy, hold, or sell? The City’s view on six housebuilder shares

A preference for Persimmon (LSE:PSN) and Barratt Redrow (LSE:BTRW) has been highlighted by a City bank after it urged investors to stay selective despite the housebuilding sector’s near-trough valuation.

UBS warns that a broad-based re-rating is unlikely in the near term, given ongoing affordability and cost pressures as well as UK and geopolitical economic uncertainty.

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The bank favours housebuilding names with strong volume recovery potential and valuation support, leading to its Buy recommendations on Persimmon and Barratt Redrow.

It is Neutral on Berkeley Group Holdings (The) (LSE:BKG), while Taylor Wimpey (LSE:TW.) has a Sell rating as UBS believes that execution risks and margin pressure could expose it to a further de-rating.

The bank also has a Sell stance on Bellway (LSE:BWY) as it warns that the sluggish market backdrop will likely delay the recovery in returns needed to support its valuation, having been the most crowded stock in the housebuilding sector so far this year.

Shares across the industry are down by an average 22% year-to-date as demand and inflationary headwinds post the Iran conflict deal a fresh blow to the sector’s recovery.

UBS said the sell-off meant valuations were now close to trough level at 0.74 times tangible book value, compared with the 2011 low of 0.6 times and the long-run average of 1.4 times.

Noting 2023’s recovery after the 2021-22 inflationary wave, the bank sees November’s expected peak in the UK’s consumer prices index as a potential re-rating catalyst. Much will depend on a reduction in the 10-year gilt yield, which this morning set a 19-year high at 5.28%.

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The bank assumes mortgage rates will remain elevated for longer and that weak underlying trends will persist in the autumn selling season. It sees flattish sales rates in the first half of 2027 followed by a modest second-half recovery due to affordability improvements.

UBS believes investors will also want clearer evidence of easing cost pressures, including through housebuilders’ commentary on supply chain negotiations heading into the new year.

The recent slide in valuations means the FTSE 100 index will soon feature just one housebuilder, with Barratt Redrow the only stock left with a valuation of more than £4 billion.

UBS holds a target price of 370p for a 12-month total return of 24% after it said the company’s significant post-merger earnings recovery remains underappreciated by the market.

The UK’s largest housebuilder by volume trades on 0.62 times forecast tangible book value and is supported by projected 2027 shareholder returns of about £400 million or the equivalent of 9% of market capitalisation. Barratt reports annual results on Wednesday.

UBS said: “Land market strengths and the balance sheet support value creation, with scope for relative outperformance as it rebuilds operational credibility.”

The highest-yielding stock in UBS’ coverage is Persimmon, which based on the bank’s estimates offers forecast dividend income of 5.3% this year and in the following two financial years.

The bank sees an expected total return of 22%, including through a price target of 1,325p.

Having performed resiliently in current market conditions, UBS said Persimmon was well positioned for a UK housing recovery given its exposure to affordable northern markets, strong record of planning outcomes and faster build rates.

The group, which is due to pay an interim dividend of 20p a share on 6 November before issuing a trading update on 12 November, is UBS’ overall sector top pick.

It said: “We see margin and returns consistently above the sector over 2027-30 with scope for outperformance as recovery momentum picks up.”

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With surplus cash and shareholder returns a key investor focus, UBS said Berkeley stood out with the sector’s strongest balance sheet. This followed the pay-down of its land creditors in the past three years, as well as selective land investment.

However, the bank is Neutral on the shares as it warns that London housing market challenges temper the potential upside to shareholder returns from a significant capital unwind. Berkeley is due to post an AGM trading update tomorrow (Friday).

UBS also has a Neutral recommendation on the partnerships-led housebuilder Vistry Group (LSE:VTY), reflecting its view that the downside risks of recent operational and financial difficulties are priced in but that a swift turnaround is unlikely amid sharply negative investor sentiment.

On Taylor Wimpey, UBS sees persistent margin underperformance in 2027 as a weak market backdrop continues to drive pricing pressure. It adds that legacy low-margin sites may also remain a drag in 2027-28.

The bank flagged increased execution risks over the next three to four years as Taylor Wimpey’s outlet expansion from 2028 will rely on planning success and higher land investments. It has a price target of 75p, with Bellway also Sell rated with a target of 1,900p.