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UK housebuilders and REITs current hotspots for shareholder upside

Published 04/09/2023, 13:27
Updated 04/09/2023, 14:10
© Reuters.  UK housebuilders and REITs current hotspots for shareholder upside
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Proactive Investors - As mortgage and interest rates approach their concurrent zenith, analysts are beginning to reassess the degree of shareholder upside in the housebuilder sector.

In a research note posted on Monday, Liberum predicted a 20% total shareholder return in the housebuilding sector, an enticing prospect for investors willing to ride out short-term sector uncertainty.

“The main catalyst for improved sector performance will be the peak in base rates, which might come as soon as 21 September,” said Liberum, while also noting positive catalysts on the regulatory front (most notably moves to scrap nutrient neutrality rules).

Crest Nicholson PLC (LON:CRST), however, was sent to Liberum’s chopping block, with analysts cutting the builder’s target price by 50p down to 220p on the expectation of a lower return on equity.

This follows Crest Nicholson’s own profit-before-tax guidance revision from £74 million to £50 million for the whole of 2023.

That said, these revised targets still imply a 30% total shareholder return upside and an appealing 9% dividend yield. As such, Crest Nicholson retained its 'buy' rating.

On the more bullish front, Liberum has high hopes for MJ Gleeson’s results due on 14 September.

Liberum reckons affordable housebuilder Gleeson’s valuation fails to reflect its resilient profits and outperforming growth story.

“We expect Gleeson’s profits to remain more resilient than all the mainstream peer group (excluding Berkeley and Vistry), with a fall of around 40% peak to trough, compared to 50-70% for the rest of the group,” said analysts, whose noted that profits have benefitted from movers seeking better-value houses.

Taylor Wimpey (LON:TW) remains the only major housebuilder on a 'hold' rating, with Barratt, Bellway (LON:BWY), Berkeley and Persimmon (LON:PSN) all netting 'buy' ratings.

REITs still trading at a discount

UK real estate investment trusts (REITs) remain skewed to the overweight side, per Morgan Stanley (NYSE:MS)’s updated ratings.

Hammerson PLC (LON:HMSO) netted a particularly bullish upgrade from the investment bank, with its price target increased by 33% to 36p.

Stifel research shows that UK REITs are trading at an average 25.3% discount to net tangible assets, with Hammerson the cheapest of the bunch at a 53.6% discount to NTA.

British Land Company PLC (LON:BLND), meanwhile, is trading at a 46.6% discount and Derwent London PLC (LON:DLN) at a 47.2% discount.

Unsurprisingly, Central London-focused Land Securities Group PLC (LON:LAND), which has significant exposure to office assets, is out of favour with analysts right now, alongside other office-exposed REITS.

“We also reduce the price targets for most UK REITs with office exposure, Derwent (LON:DLN), Great Portland Estates (LON:GPEG) and Landsec by 10-15% to reflect more weakness in offices compared to what we previously assumed,” stated Morgan Stanley (NYSE:MS).

All in all, Morgan Stanley (NYSE:MS) argues that UK REITs are oversold right now, making for a “wide risk reward”, although investors are advised to give a wide berth to overleveraged investment vehicles.

Read more on Proactive Investors UK

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