Broker snap: UBS warns of macro challenges for UK house-builders

13th Dec 2011 11:35

In its assessment of the UK house-building sector, UBS hails has warned that the upcoming year will be tough on stocks given the more challenging macro-economic outlook.UK house-builders have outperformed the FTSE All-Share index by 25% in 2011 so far, UBS notes, despite a difficult mortgage market. However, the Swiss broker has cautioned that "the macro environment is likely to become less supportive into 2012, with no GDP growth and banks facing increasingly difficult funding markets"."The current outlook for 2012 is weaker. Banks are finding it difficult to write profitable mortgages due to rising funding costs and regulatory headwinds. We expect GDP to contract modestly and unemployment to rise. The government planning overhaul and the mortgage indemnity scheme should be helpful."UBS's sector preferences are FTSE 250 peers Berkeley and Persimmon (both of which are given a buy rating) as "high-quality and high-return plays". Barratt Developments (buy) should also be preferred as the "leveraged value play over Bovis" (which is downgraded from neutral to sell on valuation grounds), the broker said.Bellway has been downgraded from buy to neutral, while Redrow and Taylor Wimpey are also given neutral ratings.Meanwhile, Panmure Gordon also published a research note on the UK house-building sector, drawing attention to today's Royal Institute of Chartered Surveyors' (RICS) house price survey. The RICS house price balance for the month of November has risen moderately, to -17 from -24 the month before. That is the highest level since July 2010. Market consensus had been expecting a slight deterioration to -25. Panmure still believes that house prices will remain "volatile" over the next 12 months, and while the market outlook for UK residential remains difficult, it should be broadly stable in the near-term."Our central case remains based on modest deflation in 2011 (-2%), and flat pricing in 2012 with low levels of transactions. Given that, we still see evidence of good value within the quoted house-building sector at the current time."The broker's key recommendations at Barratt Developments (buy with a target price of 158p) and Galliford Try (buy with a target price of 577p).By 11:35 on Tuesday, household goods and home construction stocks were making average gains of 0.38%.BC