Barratt shares fall on gloomy housing market outlook

Barratt Developments saw completions fall by nearly 4% (3.9%) in 2023 to 17,206 (from 17,908 in 2022). Reported full-year profit before tax at the FTSE 100 housebuilder rose by 9.8% to £705 million (from £642.3 million last year), while revenues remained broadly flat at £5.3 billion.

However, on an adjusted basis profits fell by 16.2% to £883.4 million (£1.1 billion), while operating margins shrank 380 basis points to 16.2% from 20% last year. The shares fell 2% on the day of results before recovering some ground in later trading.

Housebuilder hit by rising interest rates

“We have delivered a strong operational performance in a challenging operating environment. Customers continue to face cost of living and mortgage affordability challenges, and new developments are increasingly constrained by an ineffective planning system,” chief executive David Thomas told shareholders.

Meanwhile, Thomas said that he expects market conditions to “continue to be difficult over the coming months” but that Barratt is a “resilient business with a strong balance sheet.”

Indeed, the housebuilder has been busy conserving cash by dropping its share buyback scheme, and trimming its dividend payment by 8.7% to 33.7p. It had £1 billion of cash on its balance sheet at the end of the financial year.

Completions at Barratt have been hit by the high interest rate environment, which has made mortgages more expensive. The company says it started the new financial year with a “solid forward sales position”, with 49% of private wholly owned home completions forward sold, but this compares with 62% recorded at the same time last year. Barratt says it is targeting total home completions of between 13,250 and 14,250 for the current financial year.

Barratt: Housing market will take two years to recover

Meanwhile, the company told investors that it will take another two years for the housing market to bounce back from the current malaise. As such, it is maintaining a recruitment freeze. Management plans to use targeted incentives in the current full-year to generate sales from the private and social sectors, while keeping a tight rein on costs and making targeted land purchases.

Besides falling completions, Barratt is also struggling to find new sites due to the complex UK planning environment.

Analysts at broker Barclays recently increased their price target on the shares to 464p from 460p, while those at Jefferies think the shares could reach 501p.

The shares are up 6% this year to 434.2p despite the housing market headwinds. While Barratt is taking a measured approach and the shares will recover in time, there is no rush to buy them. The economy and housing market are likely to remain choppy for the foreseeable future as economic growth remains sluggish.

Past performance is not an indicator of future returns