Faith in the UK’s housing market is expected to be slightly restored in the new year, as mortgage rates slow their climb and cancellation rates cool.
A rise in mergers and acquisitions (M&A) within the sector may also be on the horizon, according to research at brokerage Jefferies.
In a note today, researchers said they were “too aggressive” with downgrading the pre-tax profit forecasts of some of the biggest housebuilders in the country by an average of 70 per cent in October.
“Consensus has started to follow suit. However, we would argue we are now starting to see signs that suggest these downgrades were too aggressive,” researchers wrote.
Share prices have bounced 10 per cent since the broker’s ‘last downgrade’ report in October.
Interest and mortgage rate rises following September’s mini-budget have tested the demand for developers, but have not brough financial stress to housebuilder’s doors, researchers added.
“The combination of mortgages rates beginning to abate and a normalisation of cancellation rates, we believe could bring improving confidence of underlying demand for UK residential new build in 1Q23 but given the lumpy nature of contracts it may take longer to see in other asset classes,” they wrote.
It puts residential developers like Berkeley, Taylor Wimpey, Bellway and Vistry in a good position. The broker has hiked the target share price of all five of the FTSE developers today.
Cash rich housebuilders are expected to embark in M&A next year.
“Into 2023 value opportunities during/after a market downturn could offer meaningful roll-up M&A for those with strong balance sheets,” added researchers.