Barratt gambles on housing market recovery

Sir Lawrie Barratt placed a massive bet on recovery in the housing market yesterday, announcing plans to build 11,000 homes-a- year by the end of the decade, a level Barratt last reached in the mid-Eighties. To fund the expansion, the housebuilder tapped the market for pounds 90m in a one- for-four rights issue, its first cash call for 13 years.

News of Barratt's growth plans came as the company bucked the recent depressing trend among Britain's large housebuilders with a jump in half- time profits from pounds 16.1m to pounds 19.1m for the six months to December. Despite difficult trading conditions, Barratt completed 3,002 homes in the six month period, an increase of 12 per cent over the comparable half year.

Sir Lawrie, who six months ago roasted the Government for its failure to support the housing market, turned his attention to fellow housebuilders this time, criticising their "flawed expectations" of recovery which had led to a surfeit of unsold houses in the industry and unnecessarily low selling prices.

The flood of poor results in the sector in recent weeks was, he said, a reflection of overbidding for land in the false dawn of 1994, when many observers believed the housing market was pulling out of recession only to be wrong-footed by a second slump.

He also criticised much of the recent corporate activity in the sector, claiming that Barratt had looked at the 12 housebuilders to have been acquired in the past three years and had rejected them all on price grounds

Warning that many of those deals, including the recent acquisition of Trafalgar House's Ideal Homes by Persimmon, had been struck at between 10 and 25 per cent over the odds, Sir Lawrie said: "Why should we take on other builders' problems and then suffer the penalty of paying goodwill for the privilege?"

Reacting to criticisms that the proposed expansion could be a re-run of the rapid growth in the late 1980s that led to a collapse into the red in 1991, and the return from retirement of Sir Lawrie, chief executive Frank Eaton said Barratt was a much better run business than five years ago. He pointed to a return on capital of over 20 per cent, which compares with the sector average of only 13 per cent.

Barratt denied it was being forced into a volume battle with Wimpey, which - following its recent asset swap withTarmac - toppled Barratt from its position as Britain's biggest housebuilder. With a new housing market share of only 4.2 per cent and a share of just 0.6 per cent of total housing transactions, the company believes it has plenty of scope for growth.

The focus will be the South-east where the company sees the greatest potential for expansion. Market improvements in that region were the biggest driver of profit growth in the first half.

Sir Lawrie continued his attack on the Government's housing policy yesterday, saying: "In spite of the favourable ratio of house prices to income and relatively low mortgage rates, the market was adversely affected by Government action to reduce Miras and Income Support."

The rights issue, pitched at 200p compared to Tuesday's close of 239p, is underwritten by SBC Warburg.

Investment Column, page 22

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