In a trading update for the period 1 July to 11 October house builder Barratt Developments (BDEV) said reservations were 20.8% ahead of last year while home completions were up 24%. The shares which have risen 27% over the last six weeks added 1.5% to 552p.
Barratt has launched 33 new developments including joint ventures, up from 26 last year which is expected to underpin the expected recovery in completion volumes.
The sector has experienced a good recovery according to Government figures with the number of housing transactions sharply higher since June with sales in July up 14.5% while Bank of England data showed a 66% jump in mortgage applications spurred by the removal of stamp duty on purchases up to £500,000.
FIRST-TIME BUYERS
Barratt says there is a dearth of mainstream mortgage lenders providing 95% loan to value deals for new builds, increasing the reliance on first-time buyers on the Help to Buy scheme.
Half of Barratt’s reservations used Help to Buy, which increased the proportion of first-time buyers to 74% up from 70% last year.
‘Help to Buy changes from April 2021 whereby the scheme will be restricted to first-time buyers,’ says Russ Mould, investment director at AJ Bell.
‘Barratt might be less affected than some of its peers but it will still have a sizeable chunk of its potential customer base which will need to find alternative ways of facilitating a property purchase. Part-exchange is one option.’
FOCUS ON TARGETS
Barratt said it continued to focus on rebuilding completion volumes towards the medium-term target and capacity of 20,000 homes.
Land has been acquired in recent years at a minimum gross margin of 23%, which along with operating efficiencies should allow the company to achieve a minimum return on capital employed of 25%. This is calculated as operating earnings divided by capital employed which is defined as total assets minus liabilities.
The group had around £570 million of net cash and undrawn revolving credit facility of £700 million at the period end. The company reaffirmed its medium term target to achieve ‘minimal total indebtedness’, defined as net cash and land creditors.
ANALYST VIEW
‘Today's solid trading update points to the group having more confidence, underpinning its FY21 targets,’ says Canaccord Genuity analyst Aynsley Lammin.
‘Overall, it is a reassuring update confirming that the autumn selling season and post lockdown recovery are going well; macro worries are likely to continue until there is more clarity over the impact of rising unemployment on house prices and volumes over the next 12 to 18 months. So far, so good though.’
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