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LONDON (Alliance News) - FTSE 100-listed housebuilder Barratt Developments PLC on Thursday said it expects to post a 45% rise in annual profit for the year to the end of June as it sold more houses at higher prices over the period, sending its shares higher after they had fallen on Wednesday on the back of buy-to-let tax changes in the UK government Budget.
Barratt said it expects pretax profit for the year to the end of June to rise by 45% to GBP565 million from GBP390.6 million, and it expects its return on capital employed to improve by 430 basis points to 23.8% from 19.5%. The pretax profit guidance is ahead of market expectations, with Morningstar reporting consensus estimates of GBP555 million.
The company said the rise in profit will be driven by increased completion volumes, a greater proportion of completions from higher margin land and underlying house price inflation net of build cost inflation.
The results from Barratt come a day after its shares and those of other UK-listed housebuilders were hit hard by the announcement made by UK Chancellor George Osborne in the Summer Budget to restrict the tax relief offered to buy-to-let landlords. Barratt and blue-chip rivals Persimmon PLC and Taylor Wimpey PLC all sunk in trade on the London Stock Exchange following the announcement.
Osborne said the government will restrict the relief on finance costs offered to residential landlords to the basic rate of income tax, which is 20%. The restriction will be phased-in over the course of four years, starting in April 2017.
The chancellor also said the government will reform how residential landlords can account for the costs they incur in improving and maintaining their rental property. At present, landlords are able to deduct 10% of their rent income from their profit in order to account for so-called "wear-and-tear" on their properties, meaning they can reduce their tax liability even when they have not improved the property.
Starting in April 2016, the government will replace this allowance with a new system which allows all landlords to only deduct costs that they actually incur.
On Thursday, Barratt Chief Executive David Thomas told Reuters that just 10% of the homes the company sold in 2015 were to to buy-to-let landlords, with most bought for cash or through a company. He said the number of transactions that would be impacted by the changes would be much lower than that 10%, as a result, and said that the market reaction to the Budget was "very overdone".
Thomas's comments, in addition to Barratt's robust results, sent shares in all three FTSE 100 housebuilders higher, with Barratt up 2.9% to 611.50 pence, Persimmon up 3.8% to 1,947.00p and Taylor Wimpey up 3.4% to 182.10 pence in late morning trade Thursday.
Barratt said it expects total completions for the year to the end of June to be up by 11% to 16,447 units from 14,838 a year earlier, on the back of strong consumer demand and increased site numbers. The rise in completions, which includes a contribution from joint ventures, came despite the group's net private reservations per active site per week falling to 0.64, from 0.69 a year earlier, though this improved to 0.70 in the second half of the year, still slightly behind the 0.71 seen a year earlier.
The group's forward sales position also looks robust, with total forward sales at GBP1.77 billion at the end of June, up 30% from the GBP1.37 billion value a year earlier. This comprises 8,777 plots, up from 6,813 plots, and the company is forward sold for around 26% of private completions due in its 2016 financial year.
On the land front, Barratt said it has continued its push to transition its land bank from older, low-margin sites to newer, higher-margin land. At the end of June, 90% of its land bank falls into the higher margin category, it said. Over the course of the financial year, Barratt approved a total of GBP957 million of operational land, down from GBP1.20 billion, equating to 16,956 plots. It is also focusing on the acquisition of options over strategic land, it added.
Barratt said its private average selling price in the year increased by 8% to GBP262,000 from GBP241,600 a year earlier, helped by changes in its sales mix and underlying house price inflation. Total average sales prices rose by 7% to GBP235,000 from GBP219,900, including affordable housing sales.
Barratt said it launched 176 new developments in the year, up from 136 a year earlier, and was operating from 399 active sites by the end of June, up from 366. Barratt said its strong sales rate for the year, particularly with the acceleration in the second half, meant it sold through developments faster than anticipated. It expects a further 3% growth in site numbers in the coming year.
"The housing market has remained strong and our operating performance has been very good. Over the last 12 months we have opened 176 new developments, increased our housing completions by 11% and committed GBP1 billion of land investment for future housing. We start the new financial year with very strong forward sales and are well on the way to meeting our 2017 targets of a 20% gross margin and at least 25% return on capital," Thomas said in the company's statement.
Barratt's good results follow hot on the heels of those from rival Persimmon, which last week said it had traded well in the first half of 2015, with legal completion volumes and revenue both rising, average selling prices higher, and its total forward sales value at the end of June up by 15%, defying the slowdown in planning applications and house-buying activity prior to the UK General Election in May.
Persimmon had said demand was backed by an increasingly competitive mortgage market, along with continued employment growth and a boost to disposable income levels in the UK.
Barratt echoed Persimmon's optimism on the state of the UK mortgage market, saying it has continued to see "a positive mortgage lending environment, with increased competition amongst lenders and new market entrants resulting in very low rates for our customers."
Earlier this week, Bovis Homes Group PLC, a smaller, FTSE 250-listed rival to the blue-chip housebuilders, said trading in the first half of 2015 had been robust, prompting it to pledge a hike to its interim dividend as its legal completions volume rose to 1,525 homes from 1,487 a year earlier and it had record sales volume in the first half.
Galliford Try PLC, which owns the Linden Homes housebuilding business and which is also FTSE 250-listed, on Wednesday also said trading has been strong, with its sales rate improving since the election. It expects total completions for the year to be 3,177 units, up from 3,107 a year earlier, including the contribution from its joint ventures and said it expects its pretax profit for its financial year to the end of June to be at the top end of market forecasts.
By Sam Unsted; samunsted@alliancenews.com; @SamUAtAlliance
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