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Barratt Developments - reservations fall as housing market slows

Barratt Developments' full-year trading update revealed a decline of 32% in sales rates.

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Barratt Developments' full-year trading update revealed a decline of 32% in sales rates. This reflects the higher mortgage rate environment, the close of the Help to Buy scheme, and a 49% decline in first-time buyer reservations.

Total forward sales as at 30 June 2023 were £2.2bn, down from £3.6bn. Build cost inflation remained at 9-10% levels, but is expected to cool down to 5% in the current financial year as the housing market slows.

The group's net cash position remained broadly flat at £1.1bn, reflecting a roughly £300m reduction in land spend which helped to offset the completion of the £200m buyback programme.

Last year's underlying pre-tax profits are expected to land in line with market expectations of around £880.6m, down from £1.1bn in the prior year.

Barratt is expecting to deliver total completions in the range of 13,250 - 14,250 this year, down from 17,206 as "significant" macroeconomic headwinds are expected to impact consumer confidence and spending.

The shares fell 4.5% following the announcement.

View the latest Barratt Developments share price and how to deal

Our view

There were no big surprises in Barratt's latest trading update. Sales rates were down substantially year-on-year, reflecting a cocktail of the higher mortgage rate environment, the closure of the Help to Buy scheme, and a 49% decline in first-time buyer reservations.

Further rate rises by the Bank of England have been pushing up borrowing costs for buyers, and the average cost of a two-year fixed-rate loan now stands at 6.7%, meaning mortgage affordability is much more difficult than it was a year ago. And with interest rates expected to remain higher for longer, market conditions could become even tougher.

These challenges are reflected in the value of Barratt's forward sales, which have fallen around 39% to £2.2bn. However, the group remains confident in delivering full-year pre-tax profits of around £880.6m, in line with previous guidance.

Whilst fewer houses are being sold, there is some good news on the top line. The group's average selling prices are being pushed higher by an increased proportion of London completions as well as underlying house price inflation.

But this comes with a caveat. London sales are usually lower margin than those of other regions and recent data suggests that London prices are beginning to trend lower, which could spell trouble for Barratt. Coupling this with increased use of sales incentives and 9-10% build cost inflation, the group's operating margins are getting squeezed. As a result, there's been a pause on recruitment as well as significantly reduced land approvals as the group aims to better manage its working capital through the storm that lies ahead.

On the balance sheet side, a net cash position of around £1.1bn gives Barratt plenty of breathing room. It helps underpin the prospective 5.8% dividend yield. But remember, payouts to shareholders are variable and can't be guaranteed.

Ultimately, housebuilders are cyclical beasts. Their fortunes tend to expand and contract in line with the economy. And with tougher borrowing conditions and economic uncertainty, people are simply less likely to wander into a show home, and even less inclined to sign on the dotted line than they were a year ago.

Barratt's in a resilient financial position, so we're not looking at an existential catastrophe. The valuation's already trading well below the long-term average, so the housing market slowdown looks well priced in. However, with interest rates set to stay higher for longer, it could be a while before we see momentum pick back up.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 13th July 2023