JP Morgan says the sector is trading below its worst-ever valuation trough, with Persimmon PLC's (LSE:PSN) lower price point and self-sufficient supply chain offering the most protection.
UK housebuilders have fallen around 30% since the Iran conflict began, but the US investment bank argues the selloff has gone too far and that the risk/reward balance is now skewed in favour of investors willing to look through near-term turbulence.
JPM says the falls reflect three investor fears: that rising mortgage rates will crimp the number of homes completed and the prices builders can charge, and that accelerating build cost inflation (the rising price of labour and materials) will squeeze margins further. Operating margins in the sector have already halved in recent years as a result of cost pressures.
It acknowledges these risks are real and warns of potential negative headlines ahead, but argues the current crisis differs from previous downturns in important ways it explores in its note.
The most compelling argument is valuation, with the sector trading at just 0.7 times its tangible net asset value (essentially the book value of land and other physical assets), which is 10% below even the trough valuation reached during the market stress of 2022.
Persimmon is JPM's top pick for two reasons. First, it builds homes at lower average selling prices than most peers, meaning it is less exposed to any weakness at the premium end of the housing market. Second, its vertically integrated model (meaning it manufactures many of its own building materials in-house) should provide some shelter against rising build costs.
The bank also remains positive on Berkeley Group Holdings PLC (LSE:BKG), the London-focused luxury housebuilder, saying a recent strategic reset has left its profit guidance on a more conservative and achievable footing, with London planning policy and demand for build-to-rent housing providing additional support.