LONDON (ShareCast) - (Sharecast News) - Analysts at Berenberg upgraded construction firms Barratt Developments and Crest Nicholson from 'hold' to 'buy' on Tuesday, stating it was "challenging the rate rise narrative".
Berenberg noted that despite "a booming housing market", the sector had underperformed the UK market by 10% year-to-date as concerns about cost inflation, the stamp duty taper, uncertainty around government support, and more broad macroeconomic worries all combined to hold back valuations through the summer.

It also highlighted that the majority of the underperformance had occurred "in recent months", with inflation rising and the probability of a rate rise increasing.

However, while the German bank admitted that housing was "undeniably rate-sensitive", it thinks the impact of small rate rises will be "far more muted" than the market has priced in.

"Demand remains high, pricing continues to offset costs, balance sheets are as strong as they have ever been, valuations are cheap and forecasts achievable, so we are confident that - despite rising rates - this underperformance will reverse," said the analysts.

Despite being more confident in the sector than others, Berenberg's analysts still opted to lower their target price on Barratt Developments, the UK's largest housebuilder, from 850.0p to 810.0p and Crest Nicholson from 450.0p to 410.0p, primarily to reflect changes in taxation, with the effective rate rising due to the corporation tax increase to 25% and the introduction of the residential development land tax.

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