Builders facing cash calls as sales slump

Many of Britain's biggest housebuilders could be forced into deeply discounted emergency rights issues before the end of the year, City analysts are warning, amid unprecedented gloom about the prospects for the sector.

More than £300m was wiped off the value of the country's six largest housebuilders yesterday, with investors panicked into a sell-off by a doom-laden report on the sector from investors at UBS. The investment bank said there was little prospect of any imminent recovery from leading housebuilders while mortgage lending remained depressed.

Mark Stockdale, UBS's lead housing analyst, said he was therefore slashing his price targets for Barratt Developments, Persimmon and Taylor Wimpey. He also made large reductions to the dividends he is forecasting from Barratt, Redrow and Taylor Wimpey.

Mr Stockdale said housebuilders, analysts and investors had been taken by surprise by the pace at which the housing market had deteriorated in the last two months and that he saw no prospect of improvement until 2010. "The speed of the collapse in April and May has been astonishing," he said. "This is as bad as 1991 – without a doubt. And the big difference is that I have never seen a housing market fall as fast as in the last eight weeks."

With all six leading housebuilders warning of serious slowdowns in sales this year, Mr Stockdale said "there has to be a reality" that some companies would be forced into rights issues to protect already fragile balance sheets.

ABN Amro analyst John Messenger warned that Barratt Development was the housebuilder most likely to make a cash call on shareholders, though he said Taylor Woodrow, Redrow and Persimmon could all follow suit.

"I personally think [Barratt] needs to do something to support the balance sheet," Mr Messenger said. "It would have to raise about £900m through a rights issue to move the business forward and put it back into a sustainable business model." Alternatively, he warned, the company might have to find a "white knight or an underwriter of last resort".

Barratt, which declined to comment yesterday, issued an interim management statement last month in which it said it continued to operate within its £2.6bn of committed facilities and its banking covenants.

Analysts are concerned that not only are house prices falling sharply, hitting consumer confidence, potential buyers were finding it increasingly difficult to find a mortgage as home loan lenders continued to be constrained by the credit crunch.

The seven largest housebuilders – now six following the merger of Taylor Woodrow and George Wimpey – were worth £18.5bn 12 months ago, but are now valued at less than £5bn after yesterday's sell-off.

Sentiment in the housing sector could be further damaged today by the latest figures on prices from Halifax Bank, which are likely to show there were further falls in May. There is also mounting concern about rising arrears among mortgage borrowers, with a widespread expectation that repossessions will rise sharply this year.

The Council of Mortgage Lenders said yesterday that its members were taking steps to help borrowers struggling to make repayments.

The CML has written to the Chancellor, Alistair Darling, pledging that members will make changes to arrears policies according to new industry guidance and tell customers about how arrears are managed so that they know what to expect.