Bank of America upgrades Berkeley to 'buy' despite mortgage rate worries

(Sharecast News) - Bank of America has slashed its estimates across the UK housebuilding sector as interest-rate cut projections have been pushed back, but raised its recommendation for Berkeley from 'neutral' to 'buy'.

Elevated inflation pressures owing to the conflict across the Persian Gulf have largely pushed back estimates for interest rate cuts by at least a year, while lower consumer confidence and affordability levels have combined to dampen the demand outlook for housebuilders.

Bank of America said it represents a "perfect storm for builders", with rapid reactions seen in mortgage rates already - the UK five-year swap rate has risen by 60 basis points in just one month to 4.2% - prompting the BoE to keep monetary policy restrictive for longer.

"That said, we still believe this is a story of recovery being pushed out instead of disappearing completely. We expect volume growth to pick up in 2028e at +6%, with EBIT margin growth recovering back to +100bps vs +10bps in 2027e. We also believe vertical integration currently happening in most builders should help navigate some cost inflation headwind," the bank said.

BofA has slashed price targets for builders in its coverage by 20% on average, but has reduced Berkeley's target by just 1% to 4,020p from 4,080p.

"Berkeley's higher presence among wealthy buyers should be more defensive in a high market volatility, in our view. Their focus on brownfield regeneration also makes them more resilient in the market downturn as greenfield relies more heavily on volume growth," the bank said.

Berkeley also has among the highest return profiles among its peers, BofA added, with a forward return on equity of 9%, which should support its price-to-earnings ratio of 12x. "[The] current valuation looks attractive to us and we upgrade to 'buy'," the bank said,

'Buy'-rated Bellway had its target slashed 31%, while Persimmon saw its target cut 19%. Barratt Redrow and Taylor Wimpey were both kept at 'neutral', with targets falling 30% and 18%, respectively, while Vistry was left at 'underperform' with its target falling 29%.

Berkeley Group