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Stock Watch: Barratt Developments

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

There’s finally some good news from the housing market.

The latest figures released just this week show that annual house price growth jumped to a 14-month high in January.

According to the figures from building society Nationwide, property prices were 1.9% higher than a year earlier, right across the UK. That’s the strongest annual growth since November 2018.

Of course, much still depends on the UK's future trading relationships and the outlook for global growth, but the latest data will certainly come as welcome news for homeowners.

It’s been a tough decade for the sector. And more recently, political instability around Brexit has kept a dampener on the property market, which has seen the sort of weak price growth that hadn’t been around since the 1990s. House prices rose just 33% in the 2010s, compared with 180% in the 1980s.

It hasn’t been all doom and gloom everywhere though. Thanks to cheap mortgages and government support it has been a boom time for Britain’s biggest housebuilders. Especially those like Barratt Developments (BDEV), which, clearly having anticipated a continuing depressed and highly-competitive property market five years ago, took pre-emptive steps to cement its position as Britain’s largest housebuilder by volume.

Back in 2015 it started introducing small changes to the way it built homes. Expensive bay windows were ditched and the angle of the roofs of its houses slightly reduced to make them easier to erect; saving on labour costs.

The reason it did it was simple and smart. It saw it was in a highly-competitive market and wanted to cut costs and raise margins to give it an edge over its rivals. As a result Barratt’s profits have managed to rise to record highs, even though sales have fallen.

Its shareholders have done very well as a result too. Barratts shares have risen almost 55% in the past 12 months. The best of that has been in the past six months or so since the housebuilder issued improved full-year pre-tax profit guidance, targeting annual volume growth of 3% to 5%, in July.

One potentially large fly in the ointment is the winding-down of the government-backed Help to Buy scheme, which has boosted demand for new homes.

The risk to Barratt and its main rivals, Persimmon, Berkeley and Redrow, is that the economy deteriorates just as the Help to Buy scheme starts to close, with the equity loan programme restricted to first time buyers in 2021 and scheduled to end altogether in 2023.

Brokers have mixed views about Barratt’s medium-term prospects, as the flurry of recent broker notes shows. Deutsche Bank has upgraded its rating on Barratt to buy from hold and raised its price target from 648p to 807p. Bank of America Merrill Lynch though has downgraded its investment rating from buy to neutral, but has raised its price target from 749p to 800p. Peel Hunt is taking a similar stance, rating the shares a hold but raising its price target from 650p to 805p.

Barratt’s half-year results are due out on Wednesday.

More on Barratt Developments

Five year performance

(%) As at 30 Jan 2015-2016 2016-2017 2017-2018 2018-2019 2019-2020
Barratt Developments 36.3 -15.7 35.4 -1.3 59.3

Past performance is not a reliable indicator of future returns

Source: FE, as at 30.1.20, in local currency terms with income reinvested

Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser

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