Barratt cuts dividend as higher mortgage costs hit housing market

UK housebuilder Barratt cut its dividend as the housing market started to cool down in response to rising interest rates and mortgage costs.

The company on Wednesday cut is interim dividend by 9% to 10.2p a share as it posted pre-tax profits of £501.5m, up 15.9%, with revenue up 24% to £2.8bn.

Net private reservations per average week from January 1 – 29 were 0.49 compared with 0.90 in the equivalent period in 2022, reflecting the more tentative demand. Forward sales at the end of January fell to 10,854 homes, or £2.67bn, from 15,736 in 2022.

Underlying operating profit rose 13.8%, but operating margins fell 1.6% due to higher administration costs and a change in selling mix. Average selling prices rose 14.6% to £330,000.

Net cash fell from £1.1bn to £965m, while free cash flow increased to £184.4m from £29.4m.

"Whilst we have seen some early signs of improvement in current trading during January, we will need to see continued momentum over the coming months before we can be confident that these challenging trading conditions are easing," said chief executive David Thomas.

“The current trading outlook remains uncertain with only four weeks' trading since the start of 2023. Reservations have shown a modest uplift since the start of January, helped by the tempering in both future interest rate and energy cost expectations, as well as the introduction of more competitive mortgage rates,” Barratt said.

“The sustainability of this recovery however remains uncertain, notably with respect to the challenges still faced by first time buyers.”

“Our full year out-turn remains dependent on how the market evolves through the spring selling season, but assuming we continue to see the improved reservation activity we have experienced since the start of calendar 2023, we expect to deliver total home completions of between 16,500 to 17,000 in FY23 (including c. 750 JV completions).”

Aarin Chiekrie, equity analyst at Hargreaves Lansdown said Barratt was "continuing to show cracks in the housing market".

"While revenues increased thanks to inflated house prices, the group’s operating margins have started to come under pressure. These thinner margins were partly a result of the group selling more houses in London, which are typically lower margin for the group."

"As consumers’ incomes get stretched thin by the cost-of-living crisis, jumping onto the housing ladder and forking out cash on higher mortgages becomes much less achievable."

"While the outlook for the second half of Barratt’s financial year remains uncertain, we’re cautiously optimistic for the group’s prospects in the long run. Recession fears have put housebuilders in a tricky spot, but Barratt’s significant net cash position of £965m gives it plenty of breathing room, even if the housing market deteriorates further.”

Reporting by Frank Prenesti for Sharecast.com