Investors in Barratt Homes may well have been disappointed at the stock market reaction to its update on Thursday. 

Shares in the housebuilder tumbled as it reported its full-year figures, even though it showed a pre-tax profit well above consensus estimates and continued strong demand.

The main problem for the housebuilder is that the stamp duty holiday finally comes to an end at the end of this month. When the tax break was introduced in July last year it created a stampede of home movers and demand for Barratt’s properties soared. Now the comparisons look weaker, and investors are worried that the market will grind to a halt without further inducements to buy. 

Smoothing the way: Housebuilder Barratt is sitting on a £1.3billion cash pile and there is scope for dividends

Smoothing the way: Housebuilder Barratt is sitting on a £1.3billion cash pile and there is scope for dividends

Smoothing the way: Housebuilder Barratt is sitting on a £1.3billion cash pile and there is scope for dividends

Barratt Homes chief executive David Thomas moved to allay these fears, saying there is ‘very strong demand for houses across the country’. He added that the company is on track to hit its long-term target of building 20,000 homes a year. 

Forward sales stand at 15,734, slightly above last year and 20 per cent above pre-pandemic levels. 

However, Thomas warned that building costs have risen by between four and five per cent due to a shortage of both materials and labour. 

Pre-tax profit is still below pre-Covid levels, despite a 65 per cent rise this year. However, this is due in part to exceptional items such as paying back coronavirus grants. 

Charlie Campbell, at broker Liberum, notes that the market is worried about the possibility of rising interest rates affecting affordability for homebuyers. 

There are also concerns over whether people will be able to afford new homes as the furlough scheme ends and the economy faces new challenges. 

It is easy to see why there is market worry, but some analysts believe it is an overreaction. Campbell says demand is still very strong, and points out that the sales rate for the firm’s properties is above the comparable period in 2019, although below 2020 levels. 

‘There is some substance to the market fears, but we think they are overdone and the durability of market strength is underestimated,’ he says.

Nicholas Hyett, analyst at wealth platform Hargreaves Lansdown, is similarly sanguine about the issue of growing costs. 

He believes higher house prices currently counterbalance these rises, although they are unlikely to do so forever. 

Some investors were hoping that Barratt, which is sitting on a huge cash pile, was about to announce a special dividend. Their disappointment may also be weighing on the share price. The company has net cash of £1.3billion, after it stopped dividend payments at the height of lockdown. While it has reinstated its final dividend, Campbell believes there is scope for further payouts. 

‘We expect a special dividend of 10p in 2022, which would give a payout of around £100million,’ he says. 

At £7.11 a share, Barratt is up eight per cent on the year, despite this week’s fall. A special dividend would make it even more attractive. 

‘Barratt has come out of the crisis in good health, and we think the long-term fundamentals of the UK housing market remain intact,’ says Hyett. 

Other housebuilders, such as Taylor Wimpey and Persimmon, may also represent an opportunity. Campbell believes that the whole sector will be rerated, possibly by as much as 20 per cent if fears over the housing market subside.

Midas verdict: The demise of the property market after the stamp duty holiday appears to have been much exaggerated, Nationwide’s house price survey showed last week. The 2.1per cent increase in prices between July and August is good news for Barratt and its shareholders as it shows we still want to buy new homes even if we have to shell out for stamp duty.

Housebuilders are seldom the most exciting stocks on the market, but they are solid, and Barratt is made more so by a large pile of cash. The prospect of a special dividend is also a draw for income seekers, and strong forward sales should be a comforting prospect for investors. Buy.

Listed on: Main market Ticker: BDEV Contact: 015 3027 8278 

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