Liberum has issued a ‘sell’ recommendation on Barratt, Persimmon and Taylor Wimpey and advises investors instead to look at Bellway and Gleeson who have more scope for growth.
In a new report on UK house-builders, Liberum says: “We believe the largest housebuilders’ valuations are too optimistic to withstand the gross margin pressure that we expect in the coming years as house price inflation is suppressed by a more vigilant regulator and build cost inflation returns.”
It explains: “Gross margin pressure threatens to cause returns to peak in the year ahead. House prices are much more stretched than widely assumed because price/income multiples are now watched by a regulator with growing powers. Stricter controls on lending standards will depress house price inflation, which could cause gross margins to fall as build costs have started rising materially, especially labour. Falling gross margins will lower returns especially for those not growing output.”
On specific builders, Liberum says: "We cut Barratt, Persimmon and Taylor Wimpey to Sell (from Hold) as valuations are too optimistic to accommodate margin pressure. We keep our Buy ratings on Bellway and Gleeson as we expect rising profit from increasing output. This is true too for Bovis (still Hold) and Redrow (Hold from Buy), but valuation is full. We keep Berkeley at Hold as it is well set to grow even as London slows."