The Berkeley Group (LON:) strategy represents a marathon, not a sprint, as part of which the group remains committed to navigating a currently difficult environment.
The “Berkeley 2035” strategy has a number of strands, with the headlines being projected growth in the Return on Capital Employed, further investment in the group’s recently launched “Build to Rent” platform (“Berkeley Living”) and an ongoing focus on shareholder returns. Some £7 billion of free cash flow has been identified to underpin the strategy over the next ten years, including £5 billion of new investment, where the group plans to maintain its historic operating margin range of between 17.5% and 19.5%. in addition, the available capital can be allocated between any or all of the three main objectives as the landscape evolves and this flexibility should play to the cash moving to where it is most needed.
In the meantime, the group’s focus on London and the South East has more recently been both a blessing and a curse. On the one hand, higher house prices following on from a systemic undersupply of homes, employment levels remaining strong and the recent round of wage rises (while inflationary) helped mitigate some of the effects of the economic backdrop.
However, more recently a red flag emerged from its September trading statement, where Berkeley revealed that new housing starts in London were currently at levels not seen since the Great Financial Crisis of 2008, even though it remained optimistic on the government’s more positive ambitions on planning permission and housing delivery, albeit at a slower pace than expected. In addition, the group is seen as being more affected than some of its peers from the recent Budget moves, such as the additional tax charge on properties over £2 million from April 2028.
The group is also differentiated from some of its rivals by being the only large housebuilder to prioritise brownfield land, which inevitably involves some of the UK’s most complex regeneration products. Of the 2022 homes delivered over this period, which compares to 2103 the year previous, 89% of the properties were built on brownfield land. This partly explains the group’s high operating margin, which increased to 20.8% from 20.2%, achieved despite a fall in the average selling price across London and the South East to £570000 from a previous £600000.
The key metrics illustrate the challenging environment, with a drop of 7.8% in revenues to £1.18 billion, albeit in line with estimates. Pre-tax profit declined by 7.7% to £254 million, which at least enabled to confirm its guidance for the full-year of £450 million (and indeed the following year also). Underlying sales reservations fell by 4% over the period, hampered by uncertainty leading up to the Budget, although perhaps at least those shackles have now been removed. Forward sales are £266 million lower at £1.137 billion, although pipeline plots increased from 12000 to 14000. Net cash of £342 million is higher than expected and provides a strong buffer for its investment and shareholder returns objectives.
For the moment, Berkeley finds itself wading through treacle given guarded consumer confidence and the possibility of higher for longer interest rates keeping some potential new buyers on the sidelines. Even though the revitalised planning system is in train, it will take some time to bed in and the group has also pointed to the overhang of additional building regulations as part of the new industry regulator’s formation. More positively, its longer-term ambitions look perfectly feasible with its land holdings currently equating to £6.51 billion of future gross margin.
The overarching concerns have fed through to a share price which has fallen by 15% over the last year, as compared to a gain of 16.4% for the wider , and by 24% over the last two years. Of course, this is a highly cyclical sector and if nothing else, the perennial undersupply of homes in the UK will provide future opportunities. For now, the market consensus of the shares as a hold is reflective that for investors, the wait has been too long and there are potentially more attractive opportunities elsewhere in the sector.