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.
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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.
