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U.K. Housebuilders are Another ‘Brexit Football’ for the Market

U.K. Housebuilders are Another ‘Brexit Football’ for the Market

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U.K. housebuilders have become a “Brexit football” and analysts are divided on whether that presents an opportunity for investors or if there’s more pain to come.

The share prices are highly sensitive to political newsflow and market views differ on the outlook for sales volume, house prices and profitability, UBS Group AG analysts Gregor Kuglitsch and Miguel Borrega wrote in a note to investors. The sector has partially recovered in recent weeks on the perception that the chance of a no-deal Brexit has receded, but the big house-building companies remain lower for the year.

U.K. Housebuilders are Another ‘Brexit Football’ for the Market

A new model created by UBS indicates profitability in the sector has probably peaked, but the market has already priced in a “harsh decline” in house values, Kuglitsch and Borrega said. The analysts said they see an average upside of around 45 percent for share prices in the sector and anticipate that strong balance sheets should protect against the prevailing political risk. Analysts at Liberum Capital Ltd. said last week they see an average 20 percent upside to U.K. housebuilders’ shares.

Analysts at Shore Capital Group Ltd, however, are turning more negative. After yet more “grim” data on the real estate market from the Royal Institution of Chartered Surveyors, “all key measures are reported on a weakening trend,” Shore’s Robin Hardy said. Pressure on margins will intensify as prices fall and companies have to spend more on marketing and asking prices are cut to get properties sold.

Having already forecast a “slow fade” in profits from 2019 onwards, Hardy said he expects “much more aggressive” cuts to estimates across the sector to emerge. Shore did, however, raise its recommendations on seven housebuilders in its coverage. Once lower estimates are acknowledged in consensus expectations and if a “less nervous” view on Brexit materializes, the sector should get a bounce, Hardy said.

Analysts at broker Peel Hunt LLP earlier this week cut average price targets for housebuilders they cover by 17 percent, citing a volatile short-term outlook for the industry. The firm said the “fluid political backdrop” may mean its assumptions change soon, but at present its central case on growth for housebuilders has shifted lower.

To contact the reporter on this story: Sam Unsted in London at sunsted@bloomberg.net

To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Jon Menon, Celeste Perri

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