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Barratt Developments sees improvement in central London home sales, says HSBC

Published: 04:45 03 Apr 2017 EDT

Barratt
Barratt's prospective dividend yield is attractive, says HSBC

Housebuilder Barratt Developments plc (LON:BDEV) is “winning the race against itself” to reduce its exposure to the oversupplied central London market, HSBC said in a note to investors today.

The company is seeing an improvement in sales of homes valued above £1,000 per square foot in zones 1 and 2 in London to overseas buyers, supported by a weaker pound, the bank said.

HSBC reiterated a ‘buy’ rating and lifted its target price to 598p from 543p.

The bank noted Barratt’s decision to offload a tranche of London homes to be rented out by a specialist company after reportedly struggling to sell them to home buyers.

The company has sold 172 homes on three sites to investor Henderson Park and US rental firm Greystar for £140.5mln.

The portfolio of homes to be rented out includes 118 in a tower that are yet to be built in Nine Elms, the area of London surrounding Battersea Power Station.

Barratt had reportedly hoped to sell the homes to buyers but will now seek to make changes to its building’s planning permission in order for Greystar to rent the homes.

HSBC welcomed the move, saying Barratt is grinding out a slow stock clearance in central London. It expects lower margin sties in central London to be complete in the second half.

“That said, the group’s exposure in this more difficult area is not yet cleared, and we await further progress from a company that doesn’t like to talk about this much,” the bank said.

“Further reducing the exposure will boost sentiment in our view.”

In February Barratt said it plans to increase the interim dividend by more than a fifth to 7.3p for the six months to 31 December and announced special dividend payments of £175mln in November 2017 and November 2018.

The special dividend implies a total dividend of 39.3p for 2017 and 40.0p for 2018, generating a potential dividend yield of more than 7%. “In a world thirsty for income, this is attractive,” HSBC said.

However, the bank believes Brexit issues may reduce the return on invested capital in 2020 to 9% from 16% at June 2017.

“Like most UK housebuilders, we value the business not based on what we currently forecast, but on a ‘soft landing’ in 2020 scenario (post Brexit) to show investors fearing such risks if there is any value in the stock even taking that risk into account.”

Shares in Barratt edged up 0.09% to 547.0p in morning trading. 

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