Barratt to build more homes amid strong demand

Homebuilder Barratt Developments (BDVE.L) expects to build 250 more homes than its previous annual forecast.

In its half year results, the company raised guidance for its full-year home completions for this year to 18,000-18,250. This was higher than the number delivered in pre-pandemic levels in 2019

It constructed 17,243 homes last year – more than any other listed housebuilder – and wants to get that up to 20,000 over the medium term.

Wednesday's strong result could help ease concerns about demand in UK's housing market after the Bank of England last week raised interest rates for the second time in two months due to rising inflation.

Between July and December 2021, Barratt was selling homes faster than anticipated, meaning that some of its 337 sites had completely sold out earlier than expected.

"We have delivered an excellent first half and the strong rebound in our construction activity means that we now expect to complete more than 18,000 homes, including 750 from JVs, this year, ahead of previous expectations and pre-COVID levels," said David Thomas, CEO of Barratts.

Profits margins rose over the past six months as "continued strong demand" for its properties. This means that its selling prices are still rising faster than its build costs, the company said.

Britain's largest housebuilder reported pre-tax profits of £432.6m ($586m) for the first half, up from £430m. Revenue dropped 9.9% to £2.2bn

Read more: UK house prices hit new high for January as market faces cooldown

Total forward sales grew by 9.1% in the first half to end-December last year to 14,818 homes, at a value of £3.7bn, up from £3.2bn.

Strong demand for housing continued into its second half, with forward sales at the end of January standing at 15,736 homes at a value of £4.1bn, compared with 14,289 homes at a value of £3.4bn same time period last year.

The FTSE 100 (^FTSE) member, which has a market capitalisation of nearly £7bn, lifted its dividend from 11.2p per share from 7.5p despite an 11% fall in completions and weaker revenue.

Shares in the company were up 2.8% on Wednesday morning in London.

Richard Hunter, head of markets at Interactive Investor, said: "Demand has been stronger than perhaps even the company was anticipating, and came despite the watering down of the Help to Buy scheme and the end of the stamp duty holiday.

"Even so, from a government perspective the drive towards more home ownership remains intact, which helps provide a generally forgiving environment for the housebuilders."

Barratts said total build costs grew by around 5% in the half year. It expects this figure to surge to 6% for the full year, reflecting strong inflation across the economy and higher building material costs related to supply constraints. But, it expects rise in costs to have a "neutral or positive effect" on margin in the second half.

"Some concerns remain, such as cost inflation and ongoing supply chain issues, while from a broader consumer perspective the elevated levels of inflation and the varying demands on the consumer wallet in the coming months could well impact sentiment as well as activity," Hunter added. "In addition, the cost of repair to some legacy properties is ongoing, although the costs are containable and slowly reducing."

The company also warned investors that its cladding bill may get bigger. Barratts said it may need to make further provisions to resolve fire safety concerns at apartment buildings it built over the past 30 years.

Read more: Cost of living crisis: UK rents rise to 13-year high

The UK housing market boomed during the COVID pandemic thanks to cheap loans, extended stamp duty tax holiday and a preference for bigger homes as more people worked from home.

"The hot housing market is providing the steam to help Barratt Developments power ahead with a strong order book with forward sales up 10% on last year," Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown said. "However underlying operational profits have drifted lower, as inflation starts to bite and the number of completions reduced as demand began to normalise from pent up demand from the last period."

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