The collapse in value of UK housebuilder share prices after the vote for Brexit is "overdone" and investors should think again, according to UBS. The Swiss investment bank said in a note that the circa 40% drop in value of housebuilder shares is pricing in a 10% fall in house prices and a 25% decline in sales volumes. This suggests housebuilder shares may lose a further 10% in value.
But UBS said its own base case is a 5% fall in house prices and a 15% drop in volumes. "We think the c40% share price fall of the sector post-EU referendum is overdone, and suggests an attractive entry point over our forecast horizon," said the note from UBS analysts.
"We recognise the range of potential outcomes remains wide... but we see average upside potential from here of c40% across the sector on a 12-month view. Until clarity improves we believe volatility is likely to remain high, but we see upside potential in the sector. While we believe the whole sector is cheap, our top picks are Bellway, Berkeley and Persimmon, which offer the most attractive risk/reward in our view."
The note also said the sector is stronger financially than it was prior to the 2008 crash because it has more ready cash and is significantly less leveraged with debt. Moreover, demand for housing should be propped up by low interest rates and schemes such as Help to Buy.
Research by the Treasury released before the 23 June referendum on Britain's membership of the European Union, in which the country voted by 52% to 48% to leave, said a severe Brexit-triggered economic shock could clip house prices by as much as 18%. The political and economic uncertainty clouding the UK is unsettling markets and wounding consumer confidence. Some economists are predicting the economy will soon enter a recession. Housebuilder shares have taken a hit on the assumption that demand for housing will weaken as a consequence.