Interactive Investor

Three top share picks among the UK housebuilders

Things have looked up for builders amid optimism that a predicted drop in interest rates will revive the sector. But one analyst believes investors must be selective following a recent rally. Here are the stocks they like best.

16th January 2024 13:29

Graeme Evans from interactive investor

On the day that it returns to the FTSE 100 index, Persimmon (LSE:PSN) got a further lift when it was named alongside Taylor Wimpey (LSE:TW.) and Bellway (LSE:BWY) as best-placed for the housebuilding sector recovery.

City bank Jefferies switched its recommendation to “buy” with its new target price of 1,706p. That implies a further 17% upside on top of the 35% rebound since Persimmon lost its place in the FTSE 100 index in September.

The York-based builder’s brief stay in the FTSE 250 ended today as it replaced Dechra Pharmaceuticals (LSE:DPH) in the FTSE 100 index, which dropped out of the top flight following its takeover.

The momentum for Persimmon and the rest of the sector has followed significant mortgage rate reductions and hopes of renewed first-time buyer support in the March budget.

With valuations up by around 30% since October, Jefferies said it was time to be more selective as the pace of catalysts in the sector begins to tail off.

The bank added: “For us the time to revisit the sector again may be early autumn, when election manifesto promises are known and confidence in a longer-term recovery in margins and returns should become clearer.”

Its other top picks alongside Persimmon remain Taylor Wimpey and Bellway, with improved price targets of 172p and 3,301p offering potential upsides of 19% and 24% respectively. Taylor trades with a projected 2024 dividend yield of 6%, the best in the bank’s coverage.

It has lowered Crest Nicholson Holdings (LSE:CRST) to Hold amid a lack of confidence in the margin pick-up potential and continued legacy issues, which yesterday resulted in another profit warning.

The bank’s analysts are also cautious on Barratt Developments (LSE:BDEV) given their view that the upside potential in deliveries will be constrained by declining outlet numbers.

It favours Bellway, Taylor Wimpey and Persimmon because they have a significant number of owned or controlled sites that are yet to open for selling. The bank believes this will be key to differentiating the builders who can leverage into an improving market.

Jefferies said: “While improving affordability and availability of mortgages should drive a step-up in selling rates, any faster sell-through on sites also accelerates the pace of outlet closures.

“With new 'oven-ready' land taking at least 18-24 months before they deliver homes, key to leveraging into the anticipated housing market recovery in 2024-25 will be the rate of outlet openings that can be achieved from the owned or controlled land banks of the housebuilders.”

Jefferies regards Persimmon as one of the best positioned, adding that forecast growth in completions is among the top end of peers over the coming two years.

It said: “Persimmon guides to a net 10 to 20 net site openings into 2024 and we believe similar is true for 2025. The relatively limited trading out of sites through the period should allow significant leverage into improving sales rates.”

Jefferies also has a buy stance and price target of 774p on Redrow (LSE:RDW), while Berkeley Group (LSE:BKG) and Barratt have “hold” recommendations with targets of 4,706p and 583p respectively. 

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.