Is Barratt Developments plc’s warning a sign to sell these 2 homebuilders?

Has Barratt Developments plc (LON: BDEV) called the top of the property market?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When Barratt Developments (LSE: BDEV) reported its results on Wednesday, the market was expecting more of the same from the homebuilder. 

However, while the company’s trading update was broadly upbeat, management issued a stark warning about the state of the London property market. Specifically, the trading update contained the following statement. “Market conditions in London at higher selling prices remain more challenging. To mitigate these risks we have taken pricing action on a number of our sites in London. Further actions to de-risk London delivery include an exchanged build and sale agreement on a bespoke development of 39 apartments for a total value of £47m.”

Considering that companies always try to put a positive spin on things within trading updates, this statement may reveal more about the London property market than it lets on. London has been a gold mine for developers in recent years as high selling prices have translated into fat profit margins. It now looks as if the boom times are coming to an end. 

Sector problems 

Barratt is unlikely to be the only company feeling the heat. Taylor Wimpey (LSE: TW) has a presence in London as well. According to the company’s website, Taylor has nine developments with properties for sales across London, none of which are on the market for less than £400,000. 

Persimmon (LSE: PSN) may be better positioned to weather the storm. According to the company’s website, most of the group’s developments are outside central London and are more reasonably priced. 

Still, the good thing about these homebuilders is that their order book gives them some visibility on future revenues. Indeed, this year Persimmon is expected to see 11% earnings per share growth off the back of already agree sales and City analysts believe Taylor will report 15% earnings per share growth. Meanwhile, for the year to 30 June, Barratt reported earnings per share growth of 21%. 

Next year analysts believe the downturn in home values across London will start to bite these firms. City analysts are predicting a decline in earnings per share across the board as Barratt, Taylor and Persimmon lose the option to take advantage of sky-high London property prices. Analysts are predicting a decline in earnings per share of 4%, 6% and 8% for Persimmon, Taylor and Barratt respectively. These declines aren’t that severe but they could be a taste of things to come for these firms. After years of explosive home price growth, it’s not unreasonable to expect a few years of slowing sales as the market catches its breath. 

Look to the long term 

Nonetheless, for long-term investors, there’s no reason to panic. The UK is grappling with a huge shortage of affordable housing and it’s unlikely the country will have enough homes for quite some time. 

So, demand for property is expected to remain high, but prices, especially in central London will come off the boil. All in all, Barratt’s warning isn’t a reason to sell the homebuilders, it’s just an indication that the days of rapid growth for the sector could be coming to an end. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »