Shrink to Grow (Returns)?

Research evidence excerpt

Shrink to Grow (Returns)?

Idea

June 30, 2026 04:00 AM GMT

Morgan Stanley & Co. International plc+MUK Housebuilders | Europe Peter Ajose-Adeogun

Equity Analyst

Shrink to Grow (Returns)? Peter.Ajose-Adeogun@morganstanley.comCedar Ekblom, CFA +44 20 7677-1618

Cedar.Ekblom@morganstanley.com +44 20 7425-4623

Our base case is for a tepid recovery in volumes for UK

Building & Construction

housebuilders mid-term. Harvesting land and shrinking capital Europe

employed is a lever to lift ROCE. Barratt Redrow screens best Industry View In-Line

for cash release; Berkley has the most optionality. The trade off

is you cap earnings in an unexpected upside scenario.

Should UK housebuilders harvest land (either by selling or not replenishing) to

boost returns? Two events in the same week have made capital allocation the live

question. First, Berkeley has effectively said new land does not clear its required

return threshold, so the best use of capital may be to sweat the existing landbank

rather than replace it. Second, a major Barratt Redrow shareholder has argued

publicly for a larger buyback, framing capital return as a route to unlock value rather

than simply a residual use of cash.

If the sector cannot rebuild volumes back to prior peaks, then owning six or sixteen

years of land may be less valuable than investors have historically assumed. The

constraints are broader with topics like planning delays, increased regulation, higher

build costs and stretched affordability all contributing to a less constructive market

backdrop.

Scenario analysis: What cash can be unlocked from working the landbank down? If

this was redirected to buybacks, how much would this represent vs. current market

caps? And what would be the implications for return on capital?