Barrett sees a 30% drop in new home reservations due to a slump in sales caused by the mortgage crisis
Barrett Developments, the largest home builder in the UK, has reported a significant decline in new home reservations by one-third as a result of the mortgage crisis impacting demand.
The housebuilder’s yearly financial report indicated an increase in its pre-tax profit and revenue. However, it also highlighted a decline in new home reservations, dropping from an average of 0.6 homes per week to 0.42 homes per week since July.
Barrett announced in a trading update for July that it has constructed 17,206 homes this year, which is a decrease of 3.9% compared to the previous year. However, the company now anticipates a decline of nearly 25% in home construction for the next year, with a projected range of 13,250 to 14,250 units.
In spite of the uncertain future, the builder located in Leicestershire disclosed that their revenue increased by 1% to £5.3 billion for the fiscal year ending on June 30, 2023. Moreover, their statutory profit before tax also rose by 9.8% to £705.1 million, aligning with the anticipated results.
Over the past year, Barrett Developments has experienced a boost in both pre-tax profit and revenue.
The increase in mortgage rates, following the Bank of England’s decision to raise the base rate by 0.1 percent to 5.25 percent over a span of two years, is significantly impacting the market, according to David Thomas, CEO of Barrett Developments.
The average five-year fixed mortgage rate hit a peak of 6.37 percent in July, but has since improved to 6.19 percent. In comparison, two years ago, the average rate for a five-year fixed mortgage was at a much lower 2.75 percent.
In spite of a challenging operating environment, Thomas declared that we achieved a robust operating performance.
Clients are confronted with difficulties related to the high cost of living and the affordability of mortgages, while the effectiveness of the planning system is increasingly impeding the progress of new developments.
Barrett announced a reduction in the final dividend from 25.7p to 23.5p compared to last year’s value. Additionally, share buybacks will be put on hold. However, it was highlighted that Barrett currently holds £1.06bn of net cash on its balance sheet.
In morning trade on Wednesday, Barrett Developments’ shares experienced a decline of 1.94% and were valued at 434.70p.
The sentiment of homebuyers has been negatively impacted due to the harsh effects of rising interest rates on the housing market. City forecasters predict that the Bank of England’s base rate may climb up to 6.25 per cent in an attempt to control inflation.
Despite a slowdown in the second half of the fiscal year, home builders are still benefiting from increased house prices. Barrett reported a 7.9 percent year-on-year rise in its average private sale price, amounting to £367,000. However, this growth rate has decelerated from 13.6 percent in the first half of the fiscal year to 3.2 percent in the second half.
Barrett is effectively handling the unfavorable circumstances in the current environment, as commented by Richard Hunter, the head of markets at Interactive Investor.
The well-documented list of adverse conditions is extensive and is expected to further grow in the upcoming financial year.
Reduced mortgage affordability and availability are causing a slowdown in consumer demand. Additionally, general economic growth, consumer confidence, and broader concerns over spending are further complicating the situation.
Simultaneously, the discontinuation of the Help to Buy scheme has resolved a major obstacle for first-time homebuyers, but the financial burden of addressing remedial construction work is proving to be quite substantial. This expense is estimated to amount to approximately £179 million over a specific timeframe.
He further stated, “The shareholder return announcement, a customary indicator of management’s faith, reflects the current uncertain outlook.”
The group has decided to halt share buybacks in the foreseeable future and has also decreased the dividend payment in order to safeguard its cash reserves for upcoming difficulties.
Despite the reduction in dividends, the estimated 7.6% yield is still noteworthy considering the current economic conditions, making it appealing to investors in search of income.
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Source: www.dailymail.co.uk
