By Laura McGuire
The prospect of cooling interest rates combined with hopes of a “soft’economic landing,” has seen faith restored in some of the UK’s biggest house building groups.
Investors hiked the share price of Vistry, and Crest Nicholson by over four per cent this morning after analysts at Barclays issued upgrades for the rival firms.
Experts at the high street bank were reviewing price targets and ratings for a number of property groups.
Crest Nicholson was promoted from ‘overweight’ to ‘equal weight’, with an increased price target of 258p from 200p. Vistry’s price target was also lifted from 740p to 980p.
Fellow housebuilder, Bellway was crowned one of the firm’s best positioned for growth. Last year, its shares traded higher than the previous despite warning of a slowdown in activity.
Analyst at Barclays said that while it believes the sector is “no longer” in deep value territory, there are still opportunities.
“While builders have reported pockets of cost declines over the last few quarters, we expect sustained labour pressures (which account for c.two-thirds of the cost base) to prevent significant cost deflation,” they explained.
“However, with operating margins having broadly halved over the last year, near-term earnings are highly leveraged into small margin improvements.”
“Modest improvements in demand could decrease sales incentives from their current highs and reduce dependence on margin dilutive bulk sales in our view, driving some near-term margin improvement,” they added.
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Confidence in UK housebuilders plummeted to an all time low last year, with many businesses warning on profits, due to surging interest rates and sky high mortgage costs.
Top bosses at Vistry slashed 200 job roles in the wake of this turmoil, and also shifted focus on solely building affordable homes via its partnerships business.
Meanwhile, Crest Nicholson warned in August that adjusted profit before tax for the full year would be £50m down from previous expectations of £73.7m.
“Crest Nicholson’s shares are up by 42 per cent and Vistry’s by 37 per cent since last October’s lows and other housebuilders, such as Barratt, Redrow, Berkeley, Persimmon and Bellway, have all rallied strongly, too,” Russ Mould, investment director at AJ Bell, told City A.M.
Mould said this reflects markets’ hopes that the Bank of England will pivot toward cutting interest rates sooner rather than later.
“Despite protestations from Governor Andrew Bailey to the contrary, and competition among the banks and building societies, which is already helping to drive mortgage rates lower,” he said.
“It also reflects how gloomy sentiment toward the builders had become, thanks to the chaos caused by Trussonomics in late 2022, rising interest rates, higher energy prices and sagging consumer confidence.”
He added: “Earnings and dividends forecasts have already been cut back deeply. Perversely, it may turn out that this meant it was a good time to look more closely at the builders – the darkest hour is before the dawn, after all.”
High street lenders slashing their mortgage deals has also helped inject some positivity into the sector.
The slew of cuts indicates that the Bank of England will lower interest rates in the coming months.
Charlie Huggins, head of equities at the Wealthclub, said: “The reason house building shares have staged something of a recovery is due to optimism around the potential for interest cuts in 2024, combined with hopes of a ‘soft’ economic landing.
“2023 was an annus horribilis for the UK property sector as rising mortgage rates locked many first-time buyers out of the market.”
He added: “Uncertainty over house prices and the economy in general also put many people off from buying a home, leading to much weaker demand for house builders.”
“At the start of 2024, there is a feeling that we might be past the worst. Mortgage rates have fallen meaningfully in recent months leading to greater affordability for new home buyers. If these declines continue it could help breathe more confidence into the UK housing market.”
