The Investment Column: Barratt

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BARRATT DEVELOPMENTS, the house-builder, was yesterday singing the virtues of the beautiful south. Rising prices and volumes in the region helped the Newcastle-Upon-Tyne-based company post a 20 per cent rise in annual pre-tax profits to a record pounds 112m. Sales breached the pounds 1bn mark for the first time, with half of volume growth coming from sales south of the Midlands.

Barratt shares distinguished themselves from fellow housebuilders, which have suffered heavy losses recently and began to recover on the back of the solid results, adding to 16.5p to 267p.

The attractions of Barratt include its 26 per cent return on capital employed, its well-stocked land bank that stretches three years ahead, and a strong balance sheet. Operationally, the modest US business, which returned to the black with pounds 1.6m operating profits this year, appears to be heading for better times.

Naturally, the discordant note is the possibility of further interest rate rises. The Bank of England made clear in the minutes of its last meeting, which were published yesterday, that house-price inflation is top if its agenda. Since its surprise decision to push up rates by a quarter of a percentage point to 5.25 per cent, Barratt shares have slipped by 20 per cent. Further rate rises appear more, not less, likely at this stage.

Barratt plays down the potential impact of a rise. To back its case, it claims that against the backdrop of rising rates in 1997/98, it still grew sales 8 per cent. Despite that, however, the shares ended up fetching little more than 150p a year ago, with base rates at 7.5 per cent.

With the MPC continuing to put the squeeze on inflationary impulses, Barratt shares could continue to struggle. At these levels, however, holders of the shares should stick with the company and be prepared for a bumpy ride.

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