The Competition and Markets Authority says there are “reasonable grounds” to expect that it will accept resolutions put forward by housebuilders Barratt and Redrow to allow their £2.5bn merger to go ahead.

Barratt said it intended to complete its takeover of its rival this week,” in a stock market statement on Monday.

But on the same day, the CMA placed the deal under an initial enforcement order, which means the firms can move ahead with integration planning, but cannot formally merge the businesses until they have addressed the watchdog’s competition concerns.

Both companies hold plots in Whitchurch, Shropshire — including nearby towns such as Nantwich, Ellesmere and Market Drayton – which raised “competition concerns in the local area” the watchdog said earlier this month.

The competition body said: “If the deal goes ahead, the CMA found that it could lead to higher prices and lower quality homes for homebuyers in this catchment area.”

However, the regulator added that the “deal did not raise UK-wide competition concerns”.

The two firms said this week they will work with the CMA to resolve this issue as it is the “only one of the more than 400 local areas where the two companies overlap”.

The watchdog said today that “there are reasonable grounds for believing that the undertakings offered by the parties, or a modified version of them, might be accepted by the CMA”.

The takeover was first announced in February, with the merged group expected to build about 23,000 homes a year and have a turnover of more than £7bn.

Barratt chief executive David Thomas, will lead the combined group. Barratt shareholders will retain 67.2% of the enlarged business, leaving Redrow shareholders with a 32.8% share.

The move follows the new government’s pre-election pledge to build 1.5 million homes over the next five years. Over the last five years, the UK built around one million homes.