Shares in major FTSE 100 and 250 housebuilders suffered a mixed day so far on the London market, as Barratt Developments’ surprise £2.5bn megamerger with Redrow highlighted investors’ skewed opinions on the state of UK housing.
Barratt was one of the biggest fallers with its share price cratering over nine per cent this morning, as its move to create the UK’s biggest housebuilders failed to impress.
Meanwhile, shares in Redrow shot up over 14 per cent.
Its cheery boost from investors appeared to trickle down into other rival firms as Crest Nicholson and Bellway also enjoyed a respective 10 per cent and three per cent rise in their share price.
Russ Mould, investment director at AJ Bell, said: “Shareholders in Redrow seem happy, those in Barratt less so, judging by the initial share price response.
“But the offer price of 763p implied for the target, using the closing prices of Tuesday night, suggests that it is not just Redrow that is cheap, as Crest Nicholson, Bellway and Taylor Wimpey look like bargains too.”
When the merger completes Barrett’s shareholders will hold approximately 67.2 per cent of the combined group, whilst Redrow will account for the remaining 32.8 per cent.
Based on the closing price of Barratt shares on 6 February 2024, the deal values Redrow at around £2.5bn.
Once formed the ‘Barratt Redrow’ behemoth will have aggregate revenues of £7.45bn.
Charlie Huggings, head of equities, at the Wealth Club, said the merger reflects the weak “state of the housing market”.
“This means healthy profit margins, robust cash flows and balance sheet strength have only become more important.”
“Barratt and Redrow obviously feel that, given current challenges, they are stronger together than apart. Given this move, other builders are likely to be asking themselves the same questions,” he added.
Both Barratt and Redrow have not hidden the fact that unusually high mortgage rates and a national cash crunch have lowered demand for homes and their services.
A separate trading announcement this morning by Barratt Developments highlighted the impact this slowdown has had on its bottom line.
During the interim, profit before tax reached £95.2m down from £501.5m in the same period the year before.
Home completions also fell by around 2,000 on a year-on-year basis.
The same goes for Redrow, who also revealed today that it made a £275m loss in revenues during the half year.
Richard Hunter, head of markets at Interactive Investor, said: “The rationale for the deal remains in sharp focus, with the toxic cocktail of housebuilder headwinds continuing to wash through.
“Squeezed mortgage affordability and availability resulted in waning customer demand, while broader concerns over general economic growth, consumer confidence and spending have all darkened the picture.”
He added: “At the same time, the removal of the Help to Buy scheme has removed an important plank from first-time buyers and legacy costs for remedial building work continue to come at a significant cost, totalling some £62m in this period.”
Despite the decisive opinion, overall sentiment in the housing market is improving.
Halifax’s latest HPI showed house prices rose by 1.3 per cent in January, marking the fourth monthly rise in a row.
Justin Moy, managing director of EHF Mortgages, said: “This is an interesting move by two major builders. It may be read as a sign of recovery in the housebuilding sector or, equally, an indication of the tough conditions caused by higher mortgage costs and inflation.”
“With the continued lack of supply of housing across the UK, the merger shouldn’t affect the wider plans of trying to meet that shortfall, but the mix of property built may need to be skewed towards smaller, more affordable options,” added the managing director.