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Barratt Developments - plans for a phased reopening

Emilie Stevens, Equity Analyst | 1 May 2020 | A A A
Barratt Developments - plans for a phased reopening

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Barratt Developments plc Ordinary 10p

Sell: 658.60 | Buy: 659.00 | Change -5.60 (-0.85%)
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Barratt Developments plans to reopen construction sites on May 11, but retail and show homes will stay closed. Initial work will focus on making sure sites are safe before opening sites gradually for work.

In the first phase, Barratt will open 180 (50%) of sites, excluding Scotland. Barratt will prioritise work on homes that customers have already exchanged or reserved.

As a result, a significant proportion of Barratt's furloughed workforce will be able to return to work earlier than planned in May.

The shares fell 2% in early trading.

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Our view

Prior to the outbreak of coronavirus, conditions were favourable for housebuilders. The story has since changed. A national lockdown and major economic uncertainty means moving house is being wiped off to-do lists.

As the UK looks towards easing lockdown, Barratt's announced plans to reopen construction sites on May 11. That's an important step but it's just the beginning. Reopening will be gradual and the group's retail shops and show homes are staying closed for now - which we know is hurting Barratt's new sales.

The disruption means Barratt now faces the prospect of both falling demand and prices. Together this will have an immediate impact on revenues and profits, which will then eat into cash. In response the group's focused on preserving as many pennies as it can. That's the right decision in our view.

The group's adopted a number of measures, including cancelling the interim dividend, which although painful for shareholders in the shorter could mean survival in the long run.

To the group's credit its balance sheet is in much better health than the last housing crisis. Barratt has around £430m in cash and also has access to £700m undrawn credit.

The key question for both Barratt and its investors is 'how long'. If COVID-19 disruption is short-lived that could mean the UK can get back on track relatively quickly. However, the longer the disruption the greater the pressure on Barratt's cash resources. What's more, a sustained economic slowdown or recession in UK could mean performance is subdued over a longer period.

If the group manages to avoid permanent damage there are reasons to be hopeful for the future. The long term fundamentals of the UK housing market will still exist - low interest rates supporting mortgage affordability and an ongoing UK housing shortage underpinning demand. And Barratt's quality proposition is well placed to meet it.

In the meantime, the next few months are crucial. While it's good news construction sites are whirring back into action, new business activity and therefore growth prospects are likely to remain subdued for some time. Investors need to be aware that it could still get uglier before we see any signs of improvement.

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COVID-19 update

On 26 April 2020, Barratt had completed 11,776 homes (2019: 11,723 homes).

Total forward sales are 12,271 homes at a value of £2.bn. Barratt expects reservations to continue at low levels until sales centres and show homes reopen. With initial construction activities prioritising sold plots at advanced stages of construction, Barratt expect a limited number of additional completions this financial year.

The group has around £430m of cash, as well as £700m in undrawn credit. Barratt is also eligible for the UK governments Covid Corporate Financing Facility, should it be needed.

As previously announced Barratt took a number of measures to manage the group's cost base and cash flow including: suspending all land buying, stopping recruitment and postponing non-essential capital expenditure. It has also cancelled the interim dividend.

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This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.