Builders to write off £300m on back of falling land and house prices

Simon Evans
Sunday 07 September 2008 00:00 BST
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The beleaguered housebuilders Barratt and Redrow are this week expected to report that plunging land prices and a market in freefall have wiped more than £300m from their portfolios.

When Barratt's chief executive, Mark Clare, reports its final results on Wednesday, he will say it has had to write off around £160m related to the value of its land bank and work in progress. He will also unveil the findings of a review of its sites' value, which the company has previously said would be likely to fall by 10 per cent.

But with Halifax figures last week showing the average British house price has slumped by more than 11 per cent over the past year, analysts are predicting that further write-offs may be needed.

Mark Hughes, at the broker Panmure Gordon, said that further deterioration in house prices, which he predicts will fall by 19 per cent during 2008, could force Barratt to write off an additional £500m in 2009. "A rights issue or debt for equity swap could certainly follow," he added.

Profits at Barratt are likely to fall by around 15 per cent over the year. Early in the summer Barratt revealed it had renegotiated its banking covenants – the terms on which cash is lent – and refinanced its debt, boosting its share price. But shares closed at 147p last week, against nearly 1,000p a year ago.

Meanwhile, the North Wales-based Redrow is expected to say on Tuesday that the value of its assets has fallen more than £150m in the past year. It is also expected to confirm job cuts and site closures. Pre-tax profits are predicted to have halved to around £60m for the year.

Kevin Cammack, analyst at Kaupthing bank, said: "It's hard to judge exactly how much write-off will be made against work in progress rather than land, since it will largely depend on how aggressively management convert this housing stock into cash. My guess is that further job cuts will come at the end of the year."

Redrow last month appointed KPMG to restructure its debt, and analysts expect its management to attempt to tap up its existing shareholders through a rights issue. Shares sat at 184p on Friday, less than half the value in September last year.

Barratt and Redrow's results come in the wake of a disastrous summer for the housebuilding industry. Taylor Wimpey last month revealed a 96 per cent fall in profits, writing off £585m. At Persimmon, the UK's biggest housebuilder, profits fell over the first half of the year by 64 per cent. It wrote off just over £40m.

Crest Nicholson, which is privately owned by HBOS and Sir Tom Hunter, recently hired the accountants Deloitte to restructure its debt. It is expected to say in the coming weeks that its backers have relaxed their covenants, easing the immediate pressure.

Shares in the sector surged last week following Gordon Brown's announcement of a package of measures to kick-start the market. However, it is thought that City investors are still betting on further woes, with short positions – bets that predict a fall in share prices – remaining stubbornly high.

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