As Rishi Sunak stepped up to give an unprecedented Summer Economic Update he faced challenges few of his predecessors have had to face. One of the more popular announcements as part of the package of measures to help the economy recover will have been the lifting of the threshold for paying Stamp Duty of property purchases. Across the country I imagine embattled housebuilders and estate agents will have allowed themselves a smile. A hope that maybe if the economy recovers the property industry can get back on track.
I now have a similar interest. I already hold shares in Persimmon and last week I added a new position in Barratt Developments.
Since those dark days of March there has been some recovery in the share price, but I think there’s a long way to go. The Chancellor has helped further lift sentiment.
Updates from the magic money tree Chancellor
One of the immediate catalysts for buying Barratt Developments shares was the update from the Chancellor. He raised the threshold for paying the expensive stamp duty on a property purchase from £125,000 to £500,000.
It means from now until 31st March 2021 everyone buying a main home under £500,000 will pay no stamp duty at all.
This will help a lot of first time buyers – nervous about job security and housing affordability – buy a property. I’m one of that camp and know that it incentivises me to take the leap and buy. It seems this Chancellor – most likely through necessity – has managed to find that elusive magic money tree – unlike Theresa May or Philip Hammond.
Getting back on track
The policy comes even as housebuilders were recovering from the impact of covid-19. Reservations are almost back at the same level as a year ago. The forward order book is actually up on where it was twelve months ago. It now stands at £3.2bn.
Overall, the outlook for all the housebuilders is improving. The crucial factor now is out of their control and that is what happens next with the virus and the economy. If both of either worsen then a cyclical stock like Barratt Developments is likely to be hit very hard. As such, the shares are a bit of a risk, as I don’t know what will happen next.
I’m thinking more that long-term, the imbalance between housing supply and demand favours the housebuilders. An improving outlook in the short-term could also be a boost for the share price, even if some of that is already priced in to the shares.
Cheap and with the potential for income again
On a forward P/E of 10 I think the Barratt Developments share price is too cheap to ignore. The whole industry is in my opinion – reflecting concerns about the end of Help to Buy in 2021 and Brexit and then of course the wider economic concerns that even existed pre-covid-19.
I also think the dividend will be reinstated soon which will boost the share price. It was cut as a measure to preserve cash at the height of the crisis. Now with furlough scheme cash being returned to the government and interest in house purchasing picking up again I think Barratt will want to reward shareholders again.
The group has around £350m in cash so I think its finances are in good shape. This should also help it bounce back quickly as it can buy land or use the cash to reward investors.
I’m optimistic about the shares. I’m targeting a 25% return within six months, although of course Brexit, the looming end of Help to Buy next year and more generally economic worries could all hold back sentiment and housebuilders’ share prices. That’s a risk I’m willing to take to bag these cheap shares and I hope there will be income as well in the not too distant future.
I think the bosses and the shareholders of Barratt Developments will be smiling long after the temporary boost of a stamp duty change have worn off.
If you like this article please do read the recent article on Persimmon’s trading update.
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The author owns shares in Barratt Developments.