Barratt Developments share surge drives bullish housebuilder outlook

With Barratt Developments seeing strong demand for their reopening, housebuilders could provide a good buying opportunity for investors and traders alike.

Barratt Developments update could be start of leg higher for housebuilders

Barratt Developments have restarted operations following a period of enforced shutdowns, marking the latest step for the industry towards finding a new normal. Many questions have been asked of exactly how the industry will be positioned once the dust of the coronavirus pandemic settled, and the significant discounts between current valuations and pre-market levels serve to highlight the feeling that there will be a significant impact. Worries appear to stem from three main fears with regards to the UK in particular.

Firstly, there is the fear over exactly how this crisis hurt demand, with the UK seemingly on life support that could be removed in October if Rishi Sunak opts against extending the furlough scheme. Perhaps the UK will be back on its feet and such a scheme will no longer be necessary.

However, with many seeing a vaccine as potentially coming in 2021, we could be in for a long road to recovery. Should that furlough scheme be removed before businesses have the chance to resume normal trading, we are looking at a huge jump in unemployment and a significant decline in demand for new builds.

That leads us into the property pricing dynamic, with many seeing this economic crisis as a precursor to sharp declines in house prices.

While Nationwide stated that UK house prices fell 1.4% in June, that is borne of very low volumes and thus will not truly reflect the reality once we see things stabilise. As such, the economic outlook will certainly be a significant determinant of house prices.

Finally, there are obvious long-standing fears over the impact of Brexit and demand from international buyers. This is certainly an unknown when it comes to the economic impact, yet it is likely to hurt sentiment for the short term given the uncertainty in play.

Given the recent taxes on international buyers, along with the possible post-Brexit impact on foreign demand, it is likely that areas such as London, which have been heavily reliant upon such demand, could be hurt more than other regions.

Now for the positives

Today’s news from Barratt Developments provides a boost for the sector, with the firm seeing strong demand as they approached the end of the lockdown. This has helped build a healthy order book for the firm, which many have presumed will be indicative of a wider sector trend.

The sector also has some potential positive announcements to look out for, just as we saw in the wake of the 2007 financial crisis. Back then, weakness in the housing market was greeted with moves to help stimulate the housing market with schemes such as 'Help to Buy'.

As things stand, this scheme becomes limited to first-time buyers in April 2021, and ends in 2023. However, there are many who believe that the current environment will see the government extend these timelines, to the benefit of the housebuilder sector.

Another issue that has held back the housing market of late has been stamp duty, with the 3% charge on additional homes making a major dent on buy-to-rent demand. While many believe that this is unlikely to change, the has been speculation that the Chancellor of the Exchequer Rishi Sunak could be on the cusp of announcing a six month stamp duty holiday.

In such a scenario, the tax would only be paid on purchases over £500,000, rather than the £125,000 currently in place. Such moves would likely have a significant impact of sentiment around the housebuilders, with any short-term rise in demand bringing hope that this crisis will be navigated successfully by the sector.

Berkeley Group leads the recovery

Looking at the recovery path for some of the main players in the industry, we can see a wide array of experiences over recent months. Leading the pack is Berkeley Group, which is now down just 19% off its late-February peak.

This is likely a reflection of the fact that this housebuilding giant has been perhaps the only firm in the sector to retain its dividend throughout the crisis. On the bottom of the pack, Crest Nicholson is down a whopping 60%, meaning it would take a 130% rise to regain its pre-crisis highs.

This a reflection of the relatively small amount of net cash on the books when this crisis hit, with the firm ultimately having to drawdown the entirety of their credit facility to bring about a more stable financial position.

Barratt Development boosted today

Out of those stocks seen above, Barratt Developments have recovered the least of those listed in the FTSE 100. Many will be looking towards those larger listed firms for greater security, and today’s news will help boost sentiment for the firm going forward.

The monthly chart highlights how we seemed to have bottomed out at a confluence of both ascending and descending trendlines back in March.

Meanwhile, on an the daily timeframe, we can see how today's rally through £5.27 builds on the recent rise off the back of a 76.4% Fibonacci retracement. With this in mind, the bulls look likely to remain in charge over the coming days, with this stock expected to continue the upward trend seen throughout the past three months

Potential targets

Analysts have a largely bullish outlook for Barratt Developments, with Refinitiv showing that there are no sell ratings attached to the firm. With Jefferies (679p) and Canaccord (625p) both upping their target price off the back of today’s announcement, the current price of 628p looks an attractive proposition for those looking to invest in the sector.

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