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Barratt Developments - reservations fall as UK market slows

Barratt Developments saw its net private reservations per week fall to 155 the first half of the year...

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Barratt Developments saw its net private reservations per week fall to 155 the first half of the year, compared to 259 last year. This reflects the slowdown in the UK housing market caused by "significant" changes in mortgage rates which reduced not only affordability, but also homebuyer confidence and reservation activity through the second quarter.

Total completions in the first half increased from 8,067 to 8,626. However, total forward sales at the end of 2022 were 10,511, down 29.1% compared to the end of 2021.

The group's average selling price increased by roughly 14.6% to £330k, reflecting an increased proportion of London completions and underlying house price inflation.

Its net cash position fell from £1.1bn to £965m, as the group committed to land spend, working capital investment and returned money to shareholders via dividends and share buybacks. Barratt stated its outlook for the second half of its financial year remained "uncertain", and have reduced land approvals and paused recruitment in order to manage its working capital.

The shares fell 2.1% following the announcement.

View the latest Barratt Developments share price and how to deal

Our View

We're seeing the first real cracks in the housing market. Demand for new builds is cooling.

Higher borrowing costs are weighing on mortgage affordability and availability. The average cost of a two-year fixed-rate loan is now about 6%. With a broader cost-of-living crisis and economic uncertainty, people are simply less likely to wander into a show home, and even less inclined to sign on the dotted line.

As a result, reservation rates fell by more than 100 homes per week between the end of 2021 and 2022. Barratt's total order book value also fell from £3.8bn to £2.5bn over the same period.

At the same time, Barratt is also grappling with 9-10% build cost inflation. This has led the group to put a pause on recruitment as well as significantly reduce land approvals in a bid to better manage its working capital through the storm that lies ahead.

Looking beyond the current turmoil, there are some bright spots. The group's average selling prices are being pushed higher by an increased proportion of London completions as well as underlying house price inflation. This is helping to offset the worst of the problems for now.

There's good news on the balance sheet side. An enviable net cash position in excess of £950m gives some options. This includes returning some cash to shareholders with a £200m share buyback program announced in September 2022. We also note the group's reduced its dividend cover policy, which is effectively a loosening of the purse-strings. Either way, it helps prop up the 7.2% prospective dividend yield. But keep in mind that yields consider share price performance as well as projected payments, so the current yield likely reflects some uncertainty too. With a long time remaining until the financial year-end, we can't rule out further downgrades.

The group's dividend policy is directly linked to profits. So, if profits fall further the dividend could too as they're variable and not guaranteed.

Ultimately, housebuilders are cyclical beasts. Their fortunes tend to expand and contract in line with the economy. Recession fears and widespread borrowing uncertainty means the housebuilders are in a tricky spot on the current cycle. Barratt is in resilient financial position, so we're not looking at an existential catastrophe. But ups and downs are to be expected in the current environment, and that's reflected in the serious market pressure housebuilder stocks have faced this year.

The current valuation could prove to be an attractive entry point, but only for those prepared to accept those inherent risks.

Barratt Developments key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 11th January 2023