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Barratt Developments - trading slows in line with expectations

Barrat Developments' first-quarter trading was in line with group expectations. Average weekly net private reservations fell from 188 to 169...

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Barratt Developments' first-quarter trading was in line with group expectations. Average weekly net private reservations fell from 188 to 169 as potential buyers face challenges around mortgage affordability. Barratt says the scrapping of the Help to Buy scheme is also having a negative impact.

The group's order book fell from £3.6bn to £2.4bn as a result of the slower reservation rate. The targeted use of incentives to drive sales has been called out as a key focus this year.

Land spending remains highly selective, with prices yet to adjust lower to reflect the uncertainty in the housing market.

Full-year completions guidance of 13,250-14,250 remains intact, expected to be slightly weighted to the second half in line with seasonal demand patterns.

The shares fell 1.9% following the announcement.

View the latest Barratt Developments share price and how to deal

Our view

Barratt Developments first-quarter trading update held no major surprises for investors.

Potential buyers are facing real challenges around mortgage affordability. Add to the mix the closure of the Help to Buy scheme and you've got a potent cocktail, which saw Barratt's average weekly reservations fall at double-digit rates in the first quarter.

Whilst fewer homes are being sold, the top line's being helped by robust house pricing so far, as well as an increased proportion of higher-priced London completions. But this comes with a caveat. London sales are typically lower margin than those of other regions. Alongside high build cost inflation and lower completion volumes, margins are likely to remain under pressure this year.

That means battening down the hatches and controlling costs will be a major focus for Barratt this year. There's been a pause on recruitment and spending on new land will remain highly selective. Build cost inflation's also set to cool from around 9-10% to around 5% this year, which would provide a welcome relief to margins.

Full-year completions guidance implies Barratt's expecting to build around 17-23% fewer homes this year. That highlights the fact that buyers are less willing, or simply less able, to step on the property ladder currently.

On the balance sheet side, a substantial net cash position of around £1.1bn at the last count gives Barratt plenty of flexibility to cope with a challenging market. No new share buyback programmes have been announced and dividends this year are forecast to decline by over 50%, broadly in line with earnings. Nonetheless the shares still carry a healthy dividend yield of over 4%. 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 though, and the valuation's trading well below the long-term average, so the housing market slowdown looks well priced in. But with interest rates set to remain higher for longer, consumer confidence and spending will continue to come under pressure this year, and it could be a while before momentum really picks back up again.

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: 18th October 2023