Barratt’s Home Reservations Slump by 30% as Mortgage Crunch Hits Sales
By Daniel Fessahaye | Updated: 22:56 BST, 6 September 2023
Barratt Developments, the largest home builder in Britain, has reported a significant decline in demand due to the mortgage crunch, with new home reservations dropping by a third. While the company saw an increase in pre-tax profits and revenue, it expressed concern over the decrease in new home reservations, which fell from an average of 0.6 homes per week to 0.42 homes per week since July.
In a trading update released in July, Barratt noted that it had constructed 17,206 homes this year, marking a 3.9% annual decline. Looking forward, the company expects to build nearly 25% fewer homes next year, with a forecast of 13,250 to 14,250 units.
Despite these challenges, Barratt revealed that its revenue for the year ending 30 June 2023 increased by 1% to £5.3 billion, in line with expectations. Additionally, its pre-tax profit rose 9.8% to £705.1 million.
David Thomas, CEO of Barratt Developments, attributed the decline in demand to the sharp rise in mortgage rates. The Bank of England has raised the base rate from 0.1% to 5.25% in less than two years. The average five-year fixed mortgage rate reached a peak of 6.37% in July, but has since decreased slightly to 6.19%. Two years ago, the average rate was 2.75%.
Thomas stated, “We have delivered a strong operational performance in a challenging operating environment. Customers continue to face cost of living and mortgage affordability challenges, while new developments are increasingly constrained by an ineffective planning system.”
Barratt also announced a reduction in its final dividend from 25.7p to 23.5p and a pause in share buybacks. However, the company maintains a net cash balance of £1.06 billion. As a result of these updates, Barratt Developments’ shares dropped 1.94% to 434.70p during Wednesday morning trading.
The housing market has been significantly impacted by rising interest rates, leading to decreased sentiment towards housebuilders. Analysts predict that the Bank of England’s base rate could reach as high as 6.25% as it attempts to control inflation. However, despite these challenges, housebuilders like Barratt continue to benefit from high house prices. The company reported a 7.9% annual increase in average private sale prices, reaching £367,000. This growth rate, however, has slowed from 13.6% in the first half of the financial year to 3.2% in the second half.
Richard Hunter, head of markets at Interactive Investor, acknowledged the difficulties faced by Barratt in the current environment but praised the company for its resilience. He stated, “All things considered, Barratts is playing a decent hand with the woeful cards being dealt to them. The list of headwinds is well-documented and lengthy, and is likely to spill over into the new financial year.”
Hunter also noted concerns about mortgage affordability and availability, as well as broader economic factors affecting consumer confidence and spending. He added, “The uncertain outlook is reflected in the shareholder return announcement, traditionally a sign of management confidence. Despite the dividend reduction, the projected yield of 7.6% remains punchy given the economic backdrop and will continue to catch the eye of income-seeking investors.”
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