Britain’s greatest housebuilder cuts development goal as storm clouds mount

As the UK’s greatest housebuilder by quantity – and its second largest by inventory market worth – there are few higher indicators as to what’s going on within the new construct market than Barratt Developments.

What it needed to say on Thursday, nonetheless, was not particularly encouraging.

The firm warned it might construct no less than 20% fewer houses this yr.

From 17,206 within the yr to finish of June, Barratt expects this yr to construct between 13,250 and 14,250 new houses within the monetary yr simply began.

It defined: “Looking ahead, we recognise that there are significant macro-economic headwinds, most notably persistent inflation and a higher interest rate environment, which will impact UK economic growth, employment, consumer confidence and spending.”

Barratt has already seen chillier circumstances.

Total housing completions within the monetary yr simply ended had been down 3.9% on the earlier 12 months – reflecting what was, very a lot, a yr of two halves. The final six months of 2022 noticed Barratt full 6.9% extra houses on the identical interval in 2021 however, in the course of the first six months of 2023, completions had been off 12.8% on the identical interval a yr earlier.

That change in fortunes suggests the latest fast tempo of rate of interest rises from the Bank of England is beginning to have an effect on homebuyers and, specifically, on first time consumers.

The firm mentioned: “Following the tip of Help to Buy and will increase in mortgage rates of interest, first time purchaser reservations within the yr decreased by 49% in comparison with [the year to the end of June 2022] and accounted for greater than half the decline in our complete reservation fee.

“Demand amongst existing homeowners was more resilient.”

Tactfully, the corporate made no reference to the federal government’s abandonment final November of its goal of constructing 300,000 new houses a yr, an announcement many within the sector consider has dampened exercise.

The blame for that, many housebuilders consider, is the federal government itself and, specifically, the Housing Secretary Michael Gove’s watering-down – within the face of stress from Conservative backbenchers – of the necessities for councils to need to plan for extra houses.

That got here on prime of Mr Gove’s strong-arming of housebuilders – however not constructing supplies suppliers – to fulfill the price of changing cladding on condo blocks across the nation within the wake of the 2017 Grenfell Tower fireplace.

As one housebuilding business supply instructed the business publication Property Week this week: “Gove seems to despise the housing industry and wants to damage it.”

While shares of Barratt fell by 4.5% at one level on the replace, dragging down fellow FTSE 100 builders Persimmon, Berkeley Group and Taylor Wimpey, there have been a number of crumbs of consolation within the assertion.

One is that the corporate expects to see inflation begin to ease this yr. While construct price inflation got here in at between 9-10% within the monetary yr simply ended, the corporate expects that to abate this yr, dropping to “around 5%”.

Another – extra a reason behind satisfaction for shareholders than would-be homebuyers – is that pre-tax income are anticipated to be in step with market expectations and that, extra importantly, Barratt – like lots of its friends – is in a a lot more healthy monetary form than it and different housebuilders had been when rates of interest had been final this excessive 15 years in the past and the monetary disaster was getting underway.

Barratt mentioned right this moment that, on the finish of the final monetary yr, it had internet money of £1.070bn even after finishing a £200m share buy-back and spending £820m on land in the course of the yr.

That is sort of a distinction with the scenario this time in 2008 when, having blown £2.2bn the earlier yr on rival Wilson Bowden, Barratt had money owed of £1.7bn supported by fairness of simply £317m. The firm subsequently wrote down the worth of its land financial institution by greater than £590m and, in September 2009, was obliged to lift £720m through a sale of recent shares.

Read extra:
Almost a million households face £500 a month mortgage hike, Bank of England warns
Average two-year fastened mortgage hits 15-year excessive

Nor is the present scenario comparable with the one the corporate went by in the course of the housing crash of the early Nineteen Nineties when Barratt practically went bust and its legendary founder, Sir Lawrie Barratt, was obliged to return out of retirement and lead a turnaround.

Now it’s price mentioning that, thus far, home costs have fallen solely modestly in contrast with occasions within the early Nineteen Nineties or round 2008-09.

And there are indicators of storm clouds gathering over the market, as proven by Bank of England information printed right this moment, which recommended that the variety of defaults on mortgage funds has elevated by the best quantity since 2009.

But housebuilders like Barratt, based mostly on the expertise of previous boom-and-bust housing market cycles, seem higher positioned to deal with no matter is coming this time round.

As Sanjiv Tumkur, head of fairness analysis at Rathbone Investment Management, instructed Sky News right this moment: “If you step back, the housebuilders have learned the lessons from previous downcycles. They’ve got strong balance sheets.

“Barratt has a internet money place of greater than £1bn – that ought to give individuals confidence that, regardless of the vagaries of close to time period buying and selling, the corporate is nicely positioned in the long run and can have the steadiness sheet to benefit from alternatives in the event that they see land costs fall.”