Barratt: Capacity to build new homes, but not enough land to build on

Barratt is currently in the process of merging with its smaller rival, Redrow. Once formed, the ‘Barratt Redrow’ behemoth could become one of the country's largest builders with revenue of up to £7.45bn.

UK housebuilder Barratt said this morning that it expects to perform “slightly ahead” of expectations in the coming financial year.

However, analysts are wary of the company’s access to land and question whether it will be able to meet its—and the government’s—homebuilding targets.

“Barratt’s performance this year is testament to its efficient operations. It is a very well-oiled machine that is able to make the most out of challenging markets,” Anthony Codling, head of European Housing and Building Materials research, said.

“That said, in our view, its short landbank strategy can hold it back, and whilst we see improving market conditions in the year ahead, Barratt expects its volumes to be lower.

“It can build homes very well. It just doesn’t have the land on which to build them,” he said.

Lowered guidance

Barratt has already lowered its guidance for the year ahead. It has said it would target construction of 13,000 to 13,500 homes during the 12 months to June next year, a drop of 7 per cent from the 14,004 homes it built during the last financial year.

Barratt is currently in the process of merging with its smaller rival, Redrow. Once formed, the ‘Barratt Redrow’ behemoth could become one of the country’s largest builders with revenue of up to £7.45bn.

“The potential acquisition of Redrow should address the landbank issues, and may cover over this issue, but it will bring its own integration challenges,” Codling added.

The deal was approved by both sets of shareholders back in May, but the merger is currently being reviewed by the Competition and Markets Authority (CMA).

The review is expected to be decided on 8 August.

Barratt’s land bank issues

“The UK homebuilding industry is having a tough time getting planning permissions. Plus, with many homeowners expected to sell due to high mortgage costs in the next 12-18 months, the demand for new builds could drop,” Yanmei Tang, an analyst at Third Bridge, said.

“The good news is that labour costs are now more reasonable… for the first time in a while, volume builders like Barratt are diversifying their suppliers to keep rising build costs in check.

“Acquiring Redrow can boost Barratt’s market position. They can use Redrow’s land to support their projects and share land banks to re-plan and introduce new products. Redrow is known for its quality, offering a more premium product than Barratt.”

However, Yang added that Barratt’s strict land-buying model—which requires a 33 per cent profit margin—has prevented them from buying land in competitive areas.

Barratt is one of the companies expected to benefit from Labour’s housing policy, which could see as many as 1.2m homes built under the current parliament—equivalent to 300,000 homes per year.

“We welcome the new government’s urgency and focus on housebuilding and reform of the planning system as key to both unlocking economic growth and tackling the chronic undersupply of new homes,” Barratt said on Wednesday.

“We look forward to working with government and wider stakeholders to address supply side constraints and deliver the new homes, of all tenures, the country needs,” the company added.