British developers enjoy profits as housebuilding climbs

Photo: Brooklands, Barratt Developments’ Milton Keynes development

British developers are enjoying strong profits, as housebuilding activity climbs in the UK.

Barratt Developments reported a 40 per cent increase in profit before tax, helping to lift dividends by 25 per cent.

“Investors will be cheered by Barratt Developments’ comments on the UK housing market, with the group saying it remains in a strong position due to improved mortgage availability and Government support,” commented Helal Miah, investment research analyst at The Share Centre.

“This has subsequently allowed the company to increase the number of completions in the first half of its financial year by 9.4 per cent. Investors should also appreciate that profit before tax increased by 40.3 per cent, helping to lift the interim dividend 25 per cent to 6 pence per share. Furthermore, ‘Return on Capital Employed’, the measure of how well the business is deploying the capital in its business’, rose 3.9 per cent to 25.5 per cent.”

“The shares trade at a reasonable 10.3x forward price to earnings ratio, in line with the sectorm” added Miah. “While we continue with our hold recommendation on the stock, we would not discourage investors from looking further at Barratt’s after a strong set of results and a solid start to the second half. However, our preferred stock for investors interested in the sector is Taylor Wimpey.”

Indeed, Taylor Wimpey also reported a strong 34.1 per cent surge in pre-tax profits in 2015, thanks to the strong UK housing market. The UK’s third biggest housebuilder was the best performer in the FTSE 100 last year, notes The Telegraph, with 7.5 per cent more homes completed than in 2014, bringing its total to 13,219. 2016 has started well too, with 0.77 sold per site per week, up 13 per cent on the start of the previous year.

The positive performance of developers’ finances, though, has led some to accuse them of not building homes as quickly as they might to keep house prices artificially high.

According to new figures, rates of new homes being built have risen 48 per cent since 2010, despite rates of planning permission rising 60 per cent.

Labour MP Clive Betts, chair of the local government select committee, told the Guardian: “I think it is clear that the big developers are building at a rate to maximise their profits rather than addressing the country’s housing need.”

He highlighted some developments with planning permission that were not due to be complete for 10 years.

“These are private companies who are very simply trying to make money for their shareholders. They are restricting supply and the government urgently needs to come forward with measures to address this.”

Nonetheless, Taylor Wimpey and the Home Builders Federation have both rejected these accusations.

“By the time we have detailed planning permission, we’ve already paid for the land – our most expensive commodity is already on our balance sheet. We are incentivised to get building because only through building will we get a return,” Jennie Daly, Taylor Wimpey’s UK land director, told the newspaper.