Britain’s largest housebuilder added to the sector’s increasingly diverging fortunes this morning by posting record annual profits.
Barratt Developments reported profits before tax totalling £910m in the year to June - a rise of 8.9% on the previous year. Operating margins were up from 17.1% to 18.9% and, in a boost for income-seekers, the total dividend per share rose 5.9% to 46.4p.
Investors with a keen eye on the housebuilders might not be surprised by the figures though. The company’s trading update in July gave us a good idea of what was to come today, touting the highest number of house completions for 11 years and a big jump in forward sales at year end.
The firm completed a total of 17,856 homes, with wholly-owned completions up by 2.6% on last year to 17,111.
And while continued Brexit uncertainty remains a thorn in the side of the housebuilders, all of which are intrinsically linked to the domestic economy, chief executive David Thomas is optimistic on Barratt’s short-term future. He said: “Whilst there is increased economic and political uncertainty, we begin the new financial year with a strong forward order book, balance sheet and cash position which we believe provides us with the resilience and flexibility to react to potential changes in the operating environment in FY20 and beyond.”
The company also pointed to sustained demand for home ownership amid long-term undersupply of new housing as a positive tailwind for the sector.
Housebuilders have been major beneficiaries of the post-crisis low-interest-rate environment and measures like Help to Buy, which have arguably been a bigger boost to the industry than to house-buyers.
And while the scheme has propped up some of the bigger players with deeper pockets despite a market slowdown, the end of the programme in 2023 could have investors reassessing growth targets and the strength of balance sheets sooner rather than later.
With most builders using Help to Buy to produce apartments and London accounting for the lion’s share of all housebuilders’ apartment sales, there is also the issue of the capital seeing steady declines in house prices over the past two years.
The scheme makes up around 40% of Barratt’s sales but, unlike many of its peers, the company has made clear its intentions to reduce its footprint in London’s subdued property market.
Investors will need to look at the exposure to this market in their companies and if, like Galliford Try and Barratt have done, they are clearly managing the scale of their projects in the capital. When the crutch is taken away, the sector will need to stand on its own two feet - a prospect which has the potential to sort the winners from the losers even more markedly.
A lot of firms have ridden the Help to Buy wave but investors will be keen to see diversification in projects away from government support, and London, as well as sensible cash reserves in the face of political uncertainty.
And then there is the broader issue of the overall economic cycle. Housebuilders normally benefit mostly from early-stage consumer confidence and cheap borrowing rates, hence the rise firms have enjoyed particularly between 2008 and 2015. While rates remain low, consumer confidence is waning. Brexit has the sector stranded in no man’s land for the time being and while there may be knock-on effects from any impact on the UK economy from October, investors will need to be wary of the more cyclical narrative at play here.
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