RBC Capital reshuffles UK housebuilder ratings after sector review

(Sharecast News) - Analysts at RBC Capital Markets took a fresh look at UK housebuilders on Tuesday, changing the ratings and target prices on some of the sector's biggest names. RBC Capital Markets stated the UK housing market was "far from broken", pointing out that the current level of mortgage approvals was back to the levels seen from April 2015 to Covid-19 and that housing transactions were also close to "normal" market levels.

Turning to house prices, RBC noted that "all the major house price indices" suggest that house prices were stable, and have yet to give up their Covid gains and have recovered from the short-lived impact of the mini-budget in September 2022.

"In our view, the UK housebuilders are hamstrung by a slow moving planning system, slow deployment of infrastructure investment, and the slow allocation of the affordable housing program. Therefore, volumes are lower than they could be, which brings operational gearing headwinds, and if we add in the fact that build cost inflation is outpacing house price inflation, returns are being hit hard," said RBC Capital.

On the company level, RBC Capital upgraded Persimmon from 'sector perform' to 'outperform' and hiked its price target on the stock from 1,375p to 1,750p, stating the firm was "leading the field" when it comes to site openings, that it was working hard to drive demand through a combination of innovative mortgage products, had a growing build to rent/partnerships operation, and that it was ahead of the pack on vertical integration.

"Persimmon's increasing exposure to build to rent and partnership plays into the themes of a Stratified Society highlighted in RBC's Imagine The Great Recalibration which explores the disruptive forces reshaping industries, economies and societies," said RBC. "We are not sure if there is a three-line whip for all of Persimmon's employees to eat three shredded wheat, but we wouldn't be surprised if there was. On a one-year view we believe that Persimmon's can do attitude will lead it to outperform the sector."

As far as Taylor Wimpey was concerned, RBC upgraded the stock from 'sector perform' to 'outperform' and bumped up its target price from 130p to 150p, stating its strategic landbank will provide "a firm foundation" for future growth.

Berkeley, however, was double-downgraded from 'outperform' to 'underperform' and saw its price target slashed from 4,900p to 3,700p, noting the firm has "a very different model" to the other housebuilders in its coverage.

"The backbone of its business is London developments focused on apartments on brownfield sites rather than single family homes built on green fields and greenbelts. This model provides a visibility of earnings that other housebuilders can only dream about, but it is unlikely to be a major beneficiary of any future Government led housing demand stimulus program, and it won't be able to turn up the wick as quickly as the mainstream housebuilders should demand pick up," said Berkeley.

However, the Canadian bank stated Berkeley's downgrade was driven not by its strategy or focus but the contents of last week's budget, stating that it expects the mansion tax and the increased taxation on landlords will impact Berkeley more than any other housebuilder given its London weighting and customer mix.

Elsewhere, RBC Capital said Barratt Redrow, one of the biggest UK housebuilders, had experienced "a trip and slip" in the building safety due diligence, and in terms of volumes, stated the whole was less than the sum of its parts. It also noted that today's housing market climate was "a tricky one" and that now was "probably not the best time" to be missing a chief financial officer.

Reporting by Iain Gilbert at Sharecast.com