Barratt shares - further turmoil ahead?

Where to next for Barratt Developments and other UK housebuilders as they face their toughest operating environment since the global financial crisis?

Despite the UK’s largest housebuilder Barratt Developments last week announcing bumper profits of £5.27 billion, up from £4.81 billion in 2021, completing 3.9% more houses than in the previous year – to pre-pandemic levels - and increasing its revenue by 9.5%, its gross margin to 24.8%, its dividend by 25% and the company also announcing a £200 million pound share buyback, its stock was downgraded by the investment bank Berenberg on Monday.

The reason Berenberg’s analysts cited for their downgrade have less to do with the huge write-downs the housebuilder had to pay for building safety works - which rose by nearly 15% to a record £1.05 billion - and the company’s pre-tax profit declining by 21% to £642.3 million from £812.2 million last year and more with economic headwinds.

Berenberg believes that next year UK housebuilders may face their toughest operating environment since the global financial crisis as several headwinds such as the cost-of-living-crisis, high inflation, rising interest rates filtering through to higher mortgage rates and an expected rise in unemployment amid a probable recession will negatively affect affordability. Added to these potential issues are the end of the Help to Buy scheme and a likely major margin erosion for housebuilders as price growth lags build cost inflation.

Alongside Barratt Developments with an updated 459 pence price target (down from 790 pence), Berenberg’s analysts downgraded seven other UK housebuilders to “hold” but upgraded Berkeley to “buy”.

In the medium-term Berenberg’s analysts seem to be more optimistic, however, and see the sector in “robust financial health,” something which David Thomas, chief executive at Barratt Developments, agrees with by recently stating “our financial strength and operational excellence position us well to navigate the macro-economic uncertainties ahead.”

John Allan, chair at Barratt, warned, however, that: “macro-economic uncertainties remain, most notably around household energy costs and elevated inflationary pressures, changes in interest rates and the consequent impacts on employment, wage growth, house prices and consumer spending and confidence.”

He went on to say that “as a business, we also face the prospect of higher taxation, the ongoing challenges around build cost inflation and the withdrawal of Help to Buy, which will close for new reservations at the end of October 2022.”

Where to next for the Barratt Development share price?

Barratt’s share price has been steadily declining since the beginning of the year with it trading at -45% year-to-date with further downside likely in store as long as the share remains below its May-to-July lows which should act as a barrier to the upside between 441.7 pence and 457.6 pence.

Barratt’s share price, alongside that of its peers, remains in a clearly defined downtrend - which was briefly interrupted between May and July by a sideways trend - before continuing.

A slip through its early September low at 393p would push the March 2020 pandemic low at 349.4p back to the fore.

Only a currently unexpected bullish reversal to above the June and August highs at 508.8p to 515.7p would indicate that a major bottoming formation is in the process of being made.