Berkeley’s trading over the first four months of its financial year has been “stable”. The group reiterated full-year pre-tax profit guidance of £525mn, which would mark a decline of nearly 6% on the prior year.
Performance is expected to be weighted towards the first half, so operating margins over the first six months are set to exceed the group’s long-term range (17.5-19.5%).
Net cash at the end of October 2024 is expected to be around £450mn (down from £532mn at the end of April), following the £229mn of shareholder returns planned for the first half.
Berkeley supports the new government's proposed changes to the planning system and says it is “committed” to helping deliver the new homes the country needs.
The shares were broadly flat following the announcement.
Our view
Berkeley’s short trading update showed that progress has been stable over the first four months of its financial year.
Its change-of-tack plans to build and rent 4,000 homes in London over ten years make sense in theory. The rental market is hot, and the aim is to set up a mature portfolio of rented assets before looking to dispose of them.
The problem is it’s a slower route to getting the full cash proceeds than the usual strategy of selling on a forward basis. It’ll also eat into surplus cash in the medium term, so there’ll be less available for shareholder returns.
Berkeley’s London focus and higher-end product, with an average sale price of £664,000 at the last count, means it offers something different from the other large builders. Many of its sites are technically challenging, and offer a differentiated living experience. That's afforded it enviable margins in the past.
Domestic and international demand in the key London area is likely to remain more robust than in other parts of the country, and the housing supply shortage doesn't look to be going away anytime soon. Cancellation rates have normalised and build cost inflation is now back at negligible levels, which is helping to support margins.
Despite moderating, given the softer market, the order book remains a key strength of the group. 90% of the planned sales this year are already locked in, which helps to underpin the slightly improved pre-tax profit guidance of £525mn.
There are some challenges to be aware of, though.
While mortgage rates have dipped from peak levels, they remain elevated and continue to cause a relative lack of urgency among buyers. Until there's more certainty about the direction of travel, potential buyers will continue to be hesitant to sign the dotted line.
Berkeley's already taken action to improve its financial resilience, with supply being carefully matched with demand and spending on new plots of land has also been reined in. But the group's best-in-class land bank means that it shouldn't have too much of an impact on growth prospects when the housing market picks back up.
The strong balance sheet supports the ongoing dividend and buyback programmes. As mentioned earlier, though, the increased investment in the new build-to-rent portfolio may limit future payouts to shareholders. As ever, no returns are guaranteed.
With its higher-end focus, Berkeley offers something different to the broader sector. That's resulted in a premium price-to-book valuation compared to peers, which is justified in our eyes. However, near-term challenges remain, one of the reasons Berkeley continues to trade below its long-term average.
Environmental, social and governance (ESG) risk
Most housebuilders are relatively low risk in terms of ESG, particularly for those in Europe. However, there are some environmental risks to consider, from direct emissions to the impact of their buildings on the local ecology. The quality and safety of their buildings is also a key risk.
According to Sustainalytics, Berkeley Group’s management of ESG risk is strong.
The group has strong science-based greenhouse reduction targets and deadlines which are backed by policy commitment and ongoing measurement, monitoring and reporting. However, while the group considers recyclability of products when making purchases, it does not disclose the percentage of recycled materials used, or a target for recycled material use in the future.
Berkeley key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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