The UK housing market is on a path to recovery, according to HSBC Holdings Plc analysts, who are recommending clients invest in the country’s bruised homebuilder stocks.
(Bloomberg) — The UK housing market is on a path to recovery, according to HSBC Holdings Plc analysts, who are recommending clients invest in the country’s bruised homebuilder stocks.
The bank says that it expects mortgage rates to start falling from the middle of the year, “bolstering an otherwise typically quieter second-half.” Sales reservations — or agreements to buy homes before they are built — are expected to return to pre-pandemic levels between 2025 and 2027, the broker said.
“We now have greater visibility about the shape of the current housing market downturn for the house-builders’ profits and cash flows and their recovery from it, which we believe to be more than priced-in to share prices,” analysts including John Fraser-Andrews wrote in a note.
They upgraded their ratings on six stocks to ‘buy’ from ‘hold’ on Thursday, including FTSE 100 members Persimmon Plc, Barratt Developments Plc and Taylor Wimpey Plc on the back of the expected property market pick-up, noting, too, that a decline in expected earnings for the second-half of the year has already been priced in by the market.
Shares in the sector trade about 50% below their pre-pandemic February 2020 highs, HSBC noted. Alongside a surge in interest rates that’s hit mortgage demand, the analysts say the selloff has also been driven by government efforts last year to force builders to pay for fire safety improvements. Companies have been told to commit to upgrades following a fatal fire in Grenfell Tower, a high-story apartment block in west London, in 2017.
HSBC had buy ratings on several UK homebuilders during last year’s selloff, before downgrading seven shares in September. Since then, the sector has traded in a narrow range.
The declines in share prices have left UK homebuilders trading at a discount to their historical valuations. A FTSE index tracking the sector sits at about 11 times earnings for the next year, according to data compiled by Bloomberg. Before the pandemic, the gauge was trading at about 14 times one-year forward earnings.
The index gained as much as 2.9% on Thursday, following an upbeat outlook from the Royal Institution for Chartered Surveyors. Britain’s property surveyors for the first time in a year said they are anticipating sales will increase with their outlook for home prices the strongest since September. Shares of online property portal Rightmove Plc gained as much as 2.3%.
–With assistance from Thyagaraju Adinarayan.
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