Investors Bet $1.6 Billion on U.K. Homebuilder Drop (Update3)

By Tim Barwell

Aug. 19 (Bloomberg) — Investors are betting about 865 million pounds ($1.61 billion) that U.K. homebuilders such as Barratt Developments Plc will continue to slide this year, with some of the steepest drops hitting companies that have fallen the most, according to research company Data Explorers.

Stock equal to about 19 percent of the market value of the seven U.K. publicly traded homebuilders is on loan, according to the London-based company, which analyzes data on shares borrowed. That’s about 45 percent higher than at the start of May.

Investors bet on a stock’s decline through a short sale, which involves borrowing shares and selling them on the expectation that they can be repurchased later at a lower price before paying back the loan, with the borrower pocketing the difference. More than 62 percent of the stock available to borrow in Barratt Developments Plc, Persimmon Plc, Bovis Homes Group Plc and Redrow Plc is now on loan, Data Explorers said.

“Short selling had a massive impact on way these stocks collapsed in June, it was crazy,” Robert Gardiner, an analyst at Davy Stockbrokers in Dublin, said by phone. “With falling house prices, and so possible land writedowns, short sellers got hold of that and drove them down further.”

Barratt’s share price has more than tripled since July 8, after it was pushed to record lows amid concerns over high levels of debt and land writedowns in the U.K.’s most widespread housing slump in three decades.

Biggest Bets

The amount of U.K. homebuilder stock on loan as of Aug. 13 was similar to the levels in late June, before the companies were pushed to record lows in London trading. The most heavily borrowed stock is Bovis Homes Group Plc, with a “utilization,” figure, or the percentage borrowed from the total available, of 67 percent. That equals 26 percent of its market value.

Shorting even 20 percent of a stock is “a heck of a stake to place,” Gardiner said.

Taylor Wimpey, which has 17 percent of its market value on loan, slipped 9.6 percent to 42.25 pence in London trading. Barratt fell 8.7 percent to 118 pence, Persimmon lost 8.1 percent and Redrow fell 7.2 percent.

Berkeley Group Holdings Plc and Bellway Plc have the smallest bets against them. Berkeley’s utilization figure is 40 percent, or 14 percent of its market value, with Bellway on 26 percent, or 7.3 percent of its value.

Earnings Due

“We are starting to see that these homebuilders have run ahead of themselves, and the short sellers are certainly looking at them again, especially with the earnings that are due to come out over the next month or so. They aren’t likely to be pretty,” Davy’s Gardiner said.

Persimmon is the first to report first-half earnings, on Aug. 21. Bovis Homes reports earnings on Aug. 26, with Taylor on Aug. 27. Barratt and Redrow Plc report the following month. Results could be “the grimmest for decades” and investors should abandon the stocks after a recent rally, Dresdner Kleinwort analyst Alistair Stewart said on Aug. 12. Liquidity in the industry is of paramount concern and forthcoming results may show cash inflow “drying to a trickle,” Stewart said.

More than $1.4 trillion of equities worldwide were on loan as of July, about a third higher than at the start of 2007, according to Spitalfields Advisors, a London-based firm specializing in securities lending.

To contact the reporter on this story: Tim Barwell in London on tbarwell@bloomberg.net

Last Updated: August 19, 2008 12:16 EDT

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