Berkeley Group (LON:) has been a highly regarded company for some considerable time, with its focus on long-term strategy a particular strength. However, the industry is inevitably cyclical and the group finds itself at the lower end of the current cycle due to a number of factors which it has described throughout this statement.
Indeed, those comments display both exasperation in the current situation but unflinching optimism for the future. The group laments a deterioration in the UK economic backdrop and in particular the requirement for Government action in reducing the disincentives within the tax, planning and regulatory system as a whole. Berkeley notes that the time required to complete an apartment building in London through acquisition, planning, consultation and clearance is now eight years, whereas ten years ago it was five.
More positively, looking through the fragility of sentiment in the near-term the group is confident that longer term prospects are intact. London remains undersupplied in terms of housing and this is compounding as developments slow. For potential buyers, there has been a period of strong wage growth and limited property inflation, coupled with adequate mortgage availability, while the current pressure on interest rates is likely to subside in time.
In the meantime, Berkeley has cut its cloth accordingly which has not been well-received by investors. A particular recent disappointment was that the group had halted land acquisitions for the time being, due to the view that the required return on investment could not be reached given a continuous increase in the tax and regulatory burden on residential development. As such, the group is concentrating on its existing land holdings and those in the pipeline which number over 50000 and 11000 respectively, which also underpins some visibility on future earnings. The expected future gross profit on this bank is some £6.4 billion, which again provides a wall of insurance.
For the time being, however, this is a tough environment. 4076 homes were sold over the period, compared to 4047 the previous year, but the average selling price of those properties was £546000, down from £592000. This inevitably added to the pressure on the operating margin, which fell from 20.1% to 18.7%, while forward sales of £1 billion compare with £1.4 billion in the year previous, albeit with some promising customer interest. At the top line, revenues fell by 4.2% to £2.38 billion, while pre-tax profit dropped by 14.7% to £451.4 million, in line with the group’s estimates. Berkeley’s conservative approach also resulted in net cash of £363 million, well ahead of the expected £300 million, and a robust balance sheet should enable the continuation of shareholder returns over the next years, currently skewed towards share buybacks in the absence of a dividend payment.
The current “Berkeley 2035” strategy represents a marathon, not a sprint. It 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 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.
With higher potential returns to be found elsewhere, the housebuilding sector is currently out of fashion. For Berkeley, a share price decline of 11% over the last year compares to a gain of 7.5% for the wider , to which it has been relegated this week. The price is down by 27% over the last two years, and by 42% since the pre-pandemic highs of January 2020. However, the group’s strategic nous and unwavering focus on a longer-term strategy has reignited some interest in the stock today, and the market consensus of the shares as a strong hold could come under some upward pressure as a result.