Barratt Developments (BDEV)

Shares in all of London's listed housebuilders rallied in the build up to last week's widely anticipated . But even the compensation of UK base rates at a 50-year low won't prevent further horror in the housing markets.

Figures from the chartered surveyors' trade body show that, on average, a chartered surveyor now sells less than one property per week, and investment bank Merrill Lynch predicts that the UK's six biggest quoted housebuilders may yet have to write down their assets by a further £11bn. Adding on writedowns they have already made, the total would be £13bn - more than the aggregate £11bn of pre-tax profits they have made in the past 10 years.

And, in a trading statement due on 18 November, Barratt is expected to play a nasty game of catch-up with its battered rivals. So far, Barratt has written down the value of its landbank by just 6 per cent. This compares with 43 per cent at Redrow and around 20 per cent at both Taylor Wimpey and Persimmon. Worse, much of Barratt's land was acquired at the top of the market. Currently, this is on its balance sheet at £3.12bn, Merrill Lynch suggests that the value of undeveloped land should be cut by anything from 40 per cent to 70 per cent. At Barratt, that would mean a write-down of between £1.3bn and £2.2bn.

In addition, following last year's acquisition of Wilson Bowden, Barratt also has £892m of goodwill on its balance sheet. Taylor Wimpey, which also made a top-of-the-market acquisition, has and City analysts expect Barratt to follow suit.

Meanwhile, a rumoured search for a has never been confirmed by the company, although a short term cash injection would help to ease its £1.65bn burden of debt.

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There is an argument that the bad news is already in the share price. But, as recent trading statements from , and Taylor Wimpey show, more bad news depresses share prices further.

Barratt's shares revived on September's announcement that its borrowing covenants now depend on cash flow generation, rather than accounting profits. However, this means the company is now pursuing sales at any price, even if that means selling at a loss.

Operating profit margins fell nearly 2 percentage points during 2007-08 and remain under pressure. Abysmal market conditions also mean that Barratt is offering generous incentives, which could come back to haunt it. For example, part-exchange is popular, but Barratt runs the risk of being saddled with unsaleable houses.

Barratt also offers a "three-year value guarantee". So, for buyers who sell within three years at a loss, Barratt promises to make good 15 per cent of the deficit. Shared equity deals are another worry. They are sold to punters as "Pay 75% now and the rest later". But a buyer's liability only stretches to a proportion of the selling price, which means that, if the house is sold at a loss, Barratt must bear the deficit. Readers who can recall the property crash of the early 1990s may remember builders, including Regalian and Rosehaugh, which, in a last ditch attempt to sell homes, offered discounts of 50 per cent on similar terms. The outcome? Rosehaugh went bust and Regalian never recovered.

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