The listed housebuilders were hit hard by the lockdown. Share prices fell sharply, including those of the biggest of the listed UK housebuilders – Barratt Developments (LSE: BDEV). Since those dark days of March, there has been some degree of recovery, but I think there’s still a long way to go. These are some of the reasons I’ve been optimistic enough to buy shares in Barratt Developments this week.
Updates from the Chancellor
One of the immediate catalysts for buying the shares was the update from the Chancellor, Rishi Sunak. In what was termed a Summer Economic Update, the threshold for paying stamp duty on a property purchase in England and Northern Ireland was lifted from £125,000 to £500,000.
It means from the time of the announcement (8 July 2020) until 31 March 2021, everyone buying a main home priced under £500,000 will pay no stamp duty at all. This should boost the market as it allows buyers to save thousands in tax.
Improving outlook
The policy comes even as housebuilders were recovering from the impact of Covid-19. Sites have reopened and housebuilders were one of the first out of the gates as lockdown conditions were eased. Reservations are almost back at the same level as a year ago. The forward order book is actually up on where it was 12 months ago. It now stands at £3.2bn.
Overall, I think the outlook for all the housebuilders, but especially Barratt, is improving. All this progress, of course, relies on lockdown continuing to ease and us not getting a second wave of the virus. If we avoid that I think the shares should do very well.
Undervalued shares and a dividend return?
That’s because shares in the housebuilders generally are undervalued, in part because of Brexit and the looming end of Help to Buy in 2021. But on a forward P/E of 10, I think the Barratt Developments share price is too cheap to ignore.
I also think the dividend will be reinstated soon, which will boost the share price. It was cut as a measure to preserve cash at the height of the crisis. Now with furlough scheme cash getting closer to its end and interest in house purchasing picking up again, I think Barratt will want to reward shareholders again.
The group has around £350m in cash so its finances are in good shape. This should also help it bounce back quickly as it can buy land or use the cash to reward investors.
The combination of government support, an improving outlook for the industry and for Barratt specifically, along with the share price being cheap and the potential to reintroduce the dividend, all make me think the shares could rocket.
The share price is still well down on where it started the year. I think there are plenty of reasons to believe it can grow strongly over the coming months.
