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Risks around the corner for housebuilders, says Deutsche Bank

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For housebuilders, the early part of 2021 is strongly underpinned by some very strong order books, but Deutsche Bank downgraded Vistry Group PLC (LON:VTY) and Crest Nicholson PLC (LON:CRST) as it sees risks on the horizon for the sector.

In a sector note considering the three key issues of house prices and affordability, government support, and mortgage pricing and availability, analysts at the bank noted that since the UK’s initial coronavirus lockdown in March, builders have made hay.

They have “reaped the combined benefits of a release of pent-up demand, the stamp duty land tax holiday and strong Help to Buy usage, which has manifested in pricing gains, high sales rates and powerful order books”.

Data indicates housing transactions will be strong in December, based on strong increases in mortgage approvals and the Deutsche analysts are not the only ones to expect news flow and investor sentiment in the sector to remain constructive in the near term.

The ongoing Brexit negotiations present “two way risks”, while other potential headwinds include the transition to a new Help to Buy scheme, which actually opens on December 16, the planned end of the stamp duty holiday at the end of March and the broader effects of the economic downturn, which the Office for Budget Responsibility forecasts will include unemployment peaking at 7.5% in the second quarter of next year.

Taking all this into account, the analysts adjust their forecasts and valuations, resulting in three rating changes.

Vistry was downgraded to ‘sell’ from ‘hold’ and Crest Nicholson to ‘hold’ from ‘buy’, while Taylor Wimpey is upgraded to ‘buy’ from ‘hold’.

For Vistry, the analysts said its “relatively high” leverage forecast at just under 40% gearing including land creditors at the current year end, “raises risks”, while for Crest the number crunchers reverse their early September upgrade following a period of strong share outperformance.

Taylor Wimpey’s upgrade follows a “much improved” trading update, where current and next year guidance was raised significantly, leading to a new target price of 179p.

The bank’s top picks are Redrow PLC (LON:RDW), where a new share price target of 673p would suggest 21% upside, and Barratt Developments PLC (LON:BDEV), where a new 742p target price potentially points to 14% upside.

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