June 13 (Bloomberg) -- U.K. homebuilders, which have fallen by an average of 30 percent in the past month in London trading, may be under priced as they now reflect a worst-case scenario that is unlikely to happen, according to UBS AG.

Share prices currently assume an ``Armageddon'' scenario that includes land writedowns of 50 percent, UBS analysts including Mark Stockdale said in a note. ``We find it hard to believe this could occur.'' Taylor Wimpey Plc led a second day of stock gains in the industry, rising 16 percent.

Britain's house builders fell earlier this week on investor concern that some may be forced to write down the value of their land, carry out discounted rights issues and swap debt for equity to cope with a deepening housing slump. Some may also breach banking covenants as earnings dry up, according to analysts. Barratt Developments Plc has lost 39 percent of its market value this week and Redrow Plc 24 percent.

``We believe that the market is being somewhat irrational,'' the UBS analysts said. ``We expect that banks would waive covenants as they are broken, agree new price and covenant packages for existing debt and support house builder cash generation. We cannot rule out rights issues or strategic investors, but we do rule out debt for equity swaps/bankruptcy.''

Taylor Wimpey, the biggest U.K. homebuilder, rose 9.5 pence to close at 70.5 pence. Barratt, the No. 2 by volume, increased 13 percent to 86.5 pence, while Redrow gained 16 percent to 163.75 pence. Other homebuilding-related stocks such as heating and plumbing product suppliers Wolseley Plc and BSS Group also rose.

Prices Recover

Taylor Wimpey and Redrow advanced yesterday after Panmure Gordon & Co. said the stocks were undervalued, London-based hedge fund Toscafund Asset Management LLP said it has no plans to sell its holdings and investors who had shorted the stock closed their positions, analysts said. Taylor Wimpey's shares had fallen ``well below'' the price justified by a 50 percent land writedown, UBS said.

Phoenix Asset Management Partners Ltd., a U.K. investment fund, also raised its stake in Barratt to 8.54 percent from the 7.41 percent it held as of June 4, according to regulatory filings released yesterday.

UBS stressed that it hasn't changed its forecasts ratings and share price targets on the homebuilders.

``We can see a lot of medium-term value. However, given the uncertainty and our view that investment thesis is now driven by recovery in 2010, we prefer to wait for trading updates in July before making any decision on valuations,'' the analysts said.

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net.

Last Updated: June 13, 2008 11:50 EDT