Housebuilder says private reservations have dropped significantly in recent weeks as interest rates have risen
The UK’s biggest housebuilder has said it expects completions in the financial year to June 2024 fall by nearly 25% given a big drop in reservations in the past month as interest rates have surged.
In an end-of-year trading update, Barratt said it had completed 17,206 homes this year, marginally above the 17,000 forecast, but said it expects this to decrease to between 13,250 and 14,250 next year, a slump of as much as 23%.
The firm said it was making this forecast based on “current market conditions and the reservation rates experienced over the past six weeks” plus its order book position and recent success in securing sales into the private rented sector.
The £5.2bn-turnover builder said that reservations had “slowed more than normal seasonal trends from mid-May to the end of June 2023” as interest rates surged in the wake of fears over the need to tackle persistent inflation in the economy.
While it reported in May that reservation rates had risen as high as 0.71 per site per week, with bulk sales accounting for less than 10% of the total, it said today that new sales had fallen to 0.67 per site.
Of this, it said, 0.24 of the total was accounted for by bulk sales to the private rented sector, leaving sales to private buyers at just 0.43 homes per site per week – as low as it reported in the aftermath of the mini-Budget crisis. Shares in Barratt fell as much as 5% on publication of the trading update, with the news also dragging down the value of other housebuilders including Persimmon and Bellway.
The worsening market and rise in interest rates has coincided with the end of the Help to Buy scheme, and Barratt said the number of first-time buyer reservations halved over the financial year compared with 2022, accounting for most of the drop in reservations. The firm said: “Looking ahead, we recognise that there are significant macro-economic headwinds, most notably persistent inflation and a higher interest rate environment, which will impact UK economic growth, employment, and consumer confidence and spending.”
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The 17,206 completions represented a drop of 3.9% on the 2022 figure, and is less of a fall than was at first expected in the wake of the mini-Budget statement.
Barratt chief executive David Thomas said the firm was on course to hit revised profit expectations for the year to 30 June, and had delivered a strong operational and financial performance in a “year of economic and political uncertainty”.
He said: “Whilst the trading backdrop has become more challenging in recent months, with many of our customers facing significant cost-of-living pressures, we have responded decisively – increasing our reservations into the private rental sector, using incentives for customers in a disciplined way, and flexing our build activity, land-buying and operating costs to reflect market conditions.”
Barratt said it had seen a like-for-like drop in house prices in its homes of around 3.5%, with the average sales price dropping further, by 8.7%, due to the use of incentives and changes in mix.
Barratt has paused in its land-buying and actually terminated more previously approved land purchases than it bought new sites, seeing a net outflow of land from the company. It said: “We anticipate that we will maintain our highly selective approach to land buying for the foreseeable future.”
The firm also said it had uncovered additional historic build liabilities, with the signing of the self-remediation contract with the government increasing the number of properties it will have to repair from 228 to 278. In addition, it said it had uncovered two further developments that may have similar concrete frame problems to those discovered at Barratt’s Citiscape development, which has cost it £40m to repair. So far just £5m has been provided for initial remediation work for these two unnamed developments, but Barratt said it was possible the liabilities “could be up to a further c. £40m”.
Barratt’s total provision for legacy building repairs for the full year will be £180m, it said. Analysts expect Barratt to post an “adjusted” pre-tax profit – before taking account of exceptional items such as provisions – of around £880m.
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