Barratt Developments share price flat amid slowing house prices

Barratt Developments’ share price has struggled to pick up momentum so far in 2022. Amid a slowdown in UK house prices, the company reported completing fewer homes in a trading update from July. Despite the market showing signs of cooling off, Barratt is upbeat about its future prospects.

UK house prices remained stagnant in July, mirroring the share price performance in one of the country’s largest house builders — Barratt Developments [BDEV.L] — over the past month.

During the pandemic, the housing market was in high demand, with especially rapid growth outside London and supply shortages reported. As recently as February, Barratt’s CEO David Thomas said, “customer interest is off the scale”, citing record reservations for new homes. In March, Halifax reported house prices were increasing at the highest rate since 2007. 

But the spiralling cost of living, alongside higher inflation and interest rates, has triggered a slowdown. This week, Nationwide said July’s 0.1% average house price gain from June was the slowest for 12 months. Values increased by 11% from the same time a year earlier, to £271,209.

In its trading update on 14 July, Barratt announced it had completed fewer homes than anticipated for fiscal 2022. The company said it built 17,908 homes, below February’s 18,000–18,250 forecast but still above the 2021 total of 17,243. Despite the mixed results, the Barratt share price closed 2.7% higher the following day.

Barratt’s stock price fall in line with market

The house building sector is navigating higher labour and materials costs, soaring energy prices, supply chain hiccups and pandemic-induced planning consent delays. Barratt said in July its building costs escalated between 9% and 10%, up from an average 6% over the year to 30 June.

Higher mortgage payments and challenges for those saving for deposits means the housing market may falter further. Market uncertainty certainly appears to have knocked Barratt’s stock. Year-to-date, as of 10 August, its share price plunged 32.3%, mostly in the first three months of 2022. Its home builder peers are similarly struggling: Persimmon [PSN.L] stock has slid 26.4% and Taylor Wimpey [TW.L] is down 25.2% over the same period. 

Analysts at Peel Hunt in June said house builders’ shares had tumbled by almost a quarter on average over the past year.

Barratt “well positioned” for 2023

Barratt is due to deliver its full fiscal year 2022 results in early September. Despite the shaky stock performance, it’s upbeat about its prospects. In July, it said it anticipated 2022 adjusted profit before tax between £1.05bn and £1.06bn, slightly ahead of market expectations of £1.048m. In fiscal 2021, the comparable figure was £919.7m. If achieved, the predictions show growth of 14% year-over-year.

Barratt said it was “well positioned” for 2023, with forward sales as of 30 June of 13,579 homes at a value of £3.6bn. This was slightly below the number of homes at the same point in 2021 (14,334 homes at £3.5bn).

In comparison, Persimmon’s recent trading update ahead of its half-year earnings on 17 August included forward sales of £1.87bn (compared with £1.82bn in 2021). But total revenue of £1.69bn was down from £1.84bn in 2021. It delivered 6,652 new homes in the first half of the year, around 10% less than H1 2021, and lower than expected “due to further delays in the planning system and material and labour shortages”. 

Taylor Wimpey performed similarly. While revenue fell 5.4% from £2.2bn to £2.1bn, pre-tax profits rose 16.3% to £334.5m and earnings per share grew 10.8% to 7.2p. Group completions fell from 7,303 to 6,790, but were still narrowly ahead of guidance.

Analysts mainly bullish about Barratt’s prospects

One positive area for Barratt is its land purchasing levels. The Times recently reported that this put it in good stead to avoid the planning delays that have beset Persimmon. At the start of the year, it bought land promoter Gladmans for £250m.

However, Barratt’s warning that cost inflation is now outpacing house price growth has led some experts to tweaked forecasts. Gregor Kuglitsch, an analyst at UBS, predicted profits for the year ahead to reduce by around £100m to £1.01bn.

But in mid-July Matthew Britzman, an equity analyst at Hargreaves Lansdown, said he believed Barratt was in “good health”, adding: “We think the long-term fundamentals of the UK housing market remain intact.” He said Barratt’s net cash stood at an “enviable” £735m, expected to rise to over £1bn by the year’s end. “That gives the group some options. Further acquisitions could be on the cards or it could return some cash to shareholders with a share buyback or special dividend.”

Of 19 analysts at the Financial Times offering a consensus on Barratt shares, seven rate it a ‘buy’, eight rate it an ‘outperform’, with four recommending to ‘hold’. The median forecast of a 757p 12-month price target from 17 analysts would be a 52.9% upside from its 10 August closing price.