Barratt Developments (LON: BDEV) shares are down 2.5% this morning as the company released its trading update. The results are in fact rather good. Which is what makes the meagre response by the Barratt share price a little odd. The likely answer is some cold feet at the political row developing. That’s over who has to pick up the bill for the cladding scandal.
Barratt’s results are, as we say, pretty good. The announcement is here. The reservation rate (how many houses reserved per development per week) has risen by over 10% (actually, 12%). Forward sales are up 6.6% – by volume, that’s not just a reflection of price increases. Home completions are up by 5% or so, the total value of forward sales (so, volume and prices combined) was up by 18.6%.
These are good results for a housebuilder. Of course, some of this is foreshadowed. We can all read the newspapers and see that the housing market continues to boom. We know very well that home prices aren’t falling.
There are those concerns about the future of course. Inflation tends to make house prices rise again and again. On the other hand, rising interest rates to curb inflation tend to make them fall. So, it’s possible to be of either view about the middle term future for the new housebuilding market.
However, the point overshadowing this is that cladding problem – Grenfell Tower. Michael Gove has decided that not only should builders fix their own problem sites they should also pay to fix all the other problem sites as well. That’s a rather open-ended claim upon the capital resources of those builders and that’s what seems to be suppressing share prices in the sector.
Barratt is pointing out that they’ve already agreed to fix, at their cost, those buildings where they made the mistake. There’s a £480 million provision in the accounts for that. But there’s more – this is politics, of course, there’s more. Barratt also has to pay another £400 million over the next decade to fix buildings that it didn’t build – through the residential property developer tax. Paying for your own mistakes is fair enough, paying for those of other people seems a bit stiff.
But again, there’s more – where the developer was a foreign company, or cannot be traced, then the other extant builders have to pay for that too. Barratt faces some unknown share of that £3 billion as well.
This political fight is important for Gove has threatened that those builders who don’t pay up – that unknown sum for the mistakes of others – might be refused planning permissions.
For Barratt, like other British housebuilders, there’re thus those three different influences to consider. Actual operating results are good – they would be in a roaring market. The inflation and possible recession question does ask how long that roaring market might exist for. And then there’s the imposition of these – arguably unfair – costs for the mistakes of others.
Careful consideration needs to be given to the balance of the three before deciding upon a trading strategy for Barratts.
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Tim Worstall is a freelance writer specialising in economics and the financial markets.