These are tough times for British house-builders, as a glance at the Barratt Developments (LSE: BDEV) share price will show you. Its stock surged in the boom years after the financial crisis, but is down 17% over the last 12 months, as sentiment towards bricks & mortar ebbs. However, the sell-off may have been overdone.
Ups and downs
There are certainly good reasons to be negative about property right now. Brexit. The slowing UK economy. Rising interest rates. The uncertain future of the Help to Buy scheme, which has driven demand for new-build properties.
Yet there are reasons to be positive, too. Barratt expects pre-tax profits to hit a record £835m, a rise of 9% on £765m in 2017, driven by its highest level of completions for a decade. It aims to boost new house sales by another 3-5% over coming years, while increasing its minimum margins from 20% to 23%. That’s being helped by new housing designs that are faster to build and reduce costs and waste.
The weaker London market is a worry although the rest of the country is holding up, with average selling prices rising 5% to £288,000 last year. Investor concerns looked priced in, though, with Barrett trading at just 8.4 times earnings and offering a forecast yield of 7.9%, with cover of 1.5.
The risk you are taking is that interest rates rise faster than expected, or the property market slows, or we get a global financial crisis. In other words, the usual dangers when investing in stocks and shares. Barratt nonetheless has long-term recovery potential.
This is a poor day for another property company, OnTheMarket (LSE: OTMP), which is down 5.45% at time of writing following publication of its interim results for the six months to 31 July.
The £79m group, which listed on AIM in February, was set up by estate agents to challenge the Rightmove and Zoopla “duopoly” and fight back against rising portal charges. Today, it posted a modest 1.4% rise in first-half revenues to £7m. But a 200% rise in administrative expenses to £12m left an adjusted operating loss of £5m, against a £2.9m profit last year.
Worryingly, average revenue per property advertiser fell from £194 to £153 over the period, but it wasn’t all gloom and doom. Period-end property listings jumped almost 74% to 7,788, while visits more than doubled to 69m.
Its cash position has also improved following its recent £30m fundraising to stand at £24.3m on 31 July, up from £3.26m six months earlier.
Power of three
Post-period end activity also shows promise, with OnTheMarket signing listing agreements with more than 11,000 estate agency and lettings branches, a 100% increase since admission to AIM. It also expanded its field sales team and launched a new national TV advertising campaign, driving visits and leads.
OnTheMarket has a battle on its hands, as it takes the fight to the big two. There are signs of progress, but admin and marketing expenses may rack up as it builds visibility in a slowing property market, with low transactions. My Foolish colleague Rupert Hargreaves is optimistic, though.
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harveyj has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.