Are Barratt’s foundations up to a stress test?
IT’S ALL looking rather rosy at Barratt Developments. On Wednesday, the UK’s largest housebuilder reported another half of strong growth.
Cheaper building sites, and more efficient house-types mean profit margins have risen from 17.9 per cent to
19.2 per cent. Add in a 4 per cent increase in the numbers of houses sold, and the end result was a jump in profits to £409.7million.
So, operational performance is firmly under control. However, the real boost to performance continues to come from favourable conditions in the wider housing market.
Firstly – interest rates, which despite recent hikes are still very low by historic standards – mean mortgages remain relatively cheap. Employment rates are the highest they’ve been since 1971 too, and more people in work is good news for the industry.
However, these wider circumstances are a bittersweet gift. On the one hand they help stimulate demand, particularly among first-time buyers – a key audience for the housebuilders. But they’re also factors outside the industry’s control, and they could vanish faster than they came.
With Brexit drawing near, there’s the very real threat of change brewing. Barratt doesn’t need to duck for cover just yet, as its strong operational performance means it’s better placed than it has been in the past. But the Government has announced the end of Help to Buy will be in 2023, plus if the UK’s departure from the EU turns nasty, it would likely knock a hole in the housing market.
Buyer sentiment is already wavering, as house prices are growing at the slowest rate in six years.
That uncertainty means the share price has wobbled recently. Despite that, Barratt has opted for a combination of buybacks and special dividends going forward, potentially meaning it will pick up its own shares at knock-down prices.
Operational improvements speak for themselves, and the shareholder returns look attractive. The problem is, though, no one knows what surprises Brexit will dig up, and only time will tell if Barratt’s foundations are up to a stress test.
“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”