Barratt's chief executive Mark Clare tells why the return of competition to the mortgage market might go a long way to kickstarting the housebuilding sector

Published on Saturday 1 August 2009 14:15

MARK Clare is learning first-hand what it is like to be a buyer trying to get a foot on the ladder in the current housing market. The chief executive of Barratt Developments is spending his summer scouring London for a flat for his 23-year-old daughter.

Although he admits the "bank of mum and dad" is giving her a leg-up by helping out with a deposit, he is shocked at the cost of mortgage lending, even with the Bank of England base rate at an all-time low.

Having ruled out one of Barratt's own properties "because we're not developing in the areas she wants to move to", Clare is surprised at the lack of choice. Despite reports that sellers are struggling to off-load their properties, even at bargain prices, he has found the supply of what he refers to as "second-hand housing" is running so short that properties are shifting almost as soon as he has had a chance to view them.

"Gazumping is back in London," he says, raising his eyebrows.

This is a welcome turn of events for the chief executive of Britain's biggest housebuilder by volume – however unhelpful it may be for his daughter's flat hunt.

Since the collapse in the mortgage market two years ago, housebuilders have been forced to stall, mothball and, in extreme cases, abandon developments as buyers have vanished. The number of new homes completed in the past two years has tumbled by about 40 per cent with prices falling by some 27 per cent, according to Clare's estimates.

Although he insists it is early days, and the London market can be erratic, the 51-year-old can barely mask his relief that signs of life are returning.

Leaning back in a comfortable boardroom chair in Barratt's headquarters just off Oxford Street, Clare looks surprisingly relaxed for man who, since he joined the company in October 2006, has spent most of his time fighting fires. Perhaps it's because he knows that within less than a fortnight he'll be celebrating his 52nd birthday at his villa in Marbella, but he's in high spirits, even managing a chuckle when difficult questions about the company's debt mountain are raised.

The last couple of years have been no easy ride for any chief executive but in Clare's case, the journey has been particularly bumpy. His decision to join Barratt in 2006 from Centrica, where he ran the residential business, surprised some in the City as he had been tipped as a potential chief executive of the energy giant. Almost as soon as he joined Barratt, he caused consternation when he took a call about the sale of rival housebuilder Wilson Bowden. For 20 years, Barratt had ploughed its own furrow, avoiding the risky merger and acquisition route. But Clare was keen to make a splash in the top job, securing Wilson Bowden in early 2007 for 2.2bn after fending off interest from rival George Wimpey. Some of Barratt's more traditional shareholders were nervous, and just a few months later their anxiety proved to be well founded when the US sub prime crisis sent financial markets on both sides of the Atlantic into freefall. Having borrowed heavily to fund the takeover, Barratt was under particular scrutiny.

Clare admits his time at the helm has been "challenging". Since 2007 he has had to part with 3,000 staff and has faced non-stop interrogation about the wisdom of the Wilson Bowden acquisition. But recently a few rays of sunshine have appeared.

The day before our meeting, Aviva Investors, an investment group linked to the insurance giant, announced it was planning a fund to buy up and rent out residential property. The news injected further confidence into housebuilding stock, which has made a comeback recently after going into freefall last autumn. Barratt shares are up 34.58 per cent over the past month while rivals such as Persimmon and Taylor Wimpey have also experienced a revival in investor interest.

At its latest trading update in July, Barratt gave considerable cause for optimism when Clare revealed that the rate at which customers are cancelling purchases has eased from 30 per cent to 20 per cent, and it is likely to complete 13,202 properties this year, in line with market expectations. However some analysts, notably Robin Hardy at KBC Peel Hunt, have warned that the recent rally will prove to be a "false dawn" with more pain on the horizon.

Clare insists that business is picking up – enough so that Barratt intends to open 80 sites in the immediate future, including an 8m housing project in Galston in Ayrshire. The first properties planned for the site of the former steelworks at Ravenscraig will also be built from September. "Customer sentiment has improved over the last six months," he says. "Those 80 developments are starting or will start over the next few months. If we didn't have confidence that there is likely to be an improvement in the market we wouldn't be making these investments."

However, the cracks in his optimistic, laid-back demeanour start to show when the conversation turns to the current state of the mortgage market. Although he rejects the "false dawn" suggestion, he does warn that the sector is unlikely to return in any meaningful way until there is a seismic shift in mortgage lending.

He says: "We are very cautious because until mortgage lending returns the demand is going to be quite constrained. If you look at the ratio of people who visit our sites and who have a real interest to those who can actually buy, the biggest reason why they can't buy is because they haven't got access to the mortgage market. Until that really starts to recover and we start to have competition in the mortgage market again, the recovery is going to be slower than it otherwise would be."

He admits that mortgage lending can't go back the heady days of 2006/7 when 100 per cent-plus loans were virtually served up on a platter, but he would like to see more lenders offering "reasonable" loan-to-values of 90 per cent. Clare acknowledges that the government has done a lot to help, introducing more shared equity schemes and providing cash for key developments that would otherwise not be completed. But he warns that it will be some time until those initiatives filter through to the front line.

Little wonder then that there has been renewed speculation about Barratt's financial position. The markets are once again awash with rumours that several housebuilders, Barratt included, will have to tap the market for extra funds. Although Clare has successfully relieved the company's balance sheet of 370 million over the last 12 months, reducing its debt to 1.28bn, the City gossips are speculating it will soon have to tap the market for up to 500m.

Clare has a well rehearsed answer up his sleeve, saying the company is currently operating "comfortably" within its banking covenants. The majority of its financial arrangements don't come up for negotiation until June 2011 and unless the market takes another dramatic turn for the worse, Clare is confident Barratt will stay on dry land.

He says: "The question is to what extent do we think there are opportunities to invest and that's the reason why all companies – not just housebuilders – are saying: are the ingredients there to suggest we should do something different?"

He also raises the spectre that Barratt will have to substantially rebuild its landbank. It spent 260m on land in the 12 months to 30 June, compared to 1,048m in 2008. Clare admits something will have to change or the company is in danger of shrinking. "We are buying modest amounts of land but we are using it up far faster than we are replacing it and unless you get that right, the company shrinks."

But he remains confident he will eventually prove his doubters wrong. The Wilson Bowden acquisition, he says, will put Barratt in a strong position when the recovery finally comes.

"The average number of dwellings required each year (to address Britain's housing shortage] is around 250,000 and this year the industry will produce 80,000 if it's lucky. It will take us ten years to recover to the sort of production levels we were at in 2007 and even then we'd still be behind 250,000. So the real concern I have as a citizen, rather than a housebuilder, is there will be a real shortage of new homes for the next ten years and maybe longer."