LONDON (Dow Jones) - Six British home builders saw more than 1 billion pounds wiped off their combined market capitalization this week, as brokers took a knife to ratings in the sector amid worries that a 1990's style housing-market slump may force companies to shore up balance sheets by issuing stock.
"The feeling is that the industry probably needs to refinance to secure its future in extraordinarily difficult trading conditions," said Kevin Cammack, analyst at Kaupthing, Singer & Friedlander, speaking about the heavy losses made by the sector since the start of the week.
"At the front of the queue, as it's most in danger of breaching its covenants and needing equity, is Barratt Developments (LSE:BDEV) ," he added.
Shares in Barratt Developments (LSE:BDEV) fell 21% on Wednesday trade, taking losses this week to 49%.
Bellway (LSE:BWY) shares have dropped 24% this week, shares in Berkeley Group (LSE:BKG) have fallen 14%, Redrow (LSE:RDW) shares have dropped 30%, Persimmon shares have fallen 19% and Taylor Wimpey shares have dropped 37%.
Collectively, the above home builders have shed approximately 1.2 billion pounds ($2.3 billion) of market capitalization since last Friday's close amid growing pessimism about house prices and how that will feed through to corporate balance sheets.
On Wednesday, Merrill Lynch cut Barratt Developments Bellway, Berkeley Group (LSE:BKG) and Redrow (LSE:RDW) to underperform from neutral, and Persimmon to neutral from buy.
The broker said that, given the deteriorating market backdrop over the past three months, it believes that the situation for the homebuilders is becoming more like that seen in the early 1990s housing market recession in the U.K..
"We believe that if current house price trends continue then the U.K. house builders will have to face up to the serious risk of land bank write-downs," Merrill Lynch said.
"A 20% or more fall in house prices in a 12-month period has the potential to eliminate all of a house builder's net asset base. Moreover, the early 1990's precedent would suggest that one write-down will be insufficient," the broker said.
The broker went on to say that if home builders start to write down net asset values, then most "will have little option" but to come to the market for additional capital, and subsequent rights issues or share placing moves will be both deeply discounted and heavy.
Merrill Lynch's comments join a recent chorus of increasingly pessimistic comments from other brokers covering the sector as market data continues to worsen.
On Tuesday, Goldman Sachs analysts noted each 1% fall in house prices led to a 3% fall in land values during the 1990s downturn.
