Berkeley Group Holdings plc (BKG) ORD GBP0.054141

Berkeley's full-year revenue fell 3.4% to £2.5bn, as the group sold 13% fewer homes than the prior year. Operating costs were broadly flat, but pre-tax profit fell 7.7% to £557mn largely due to the lower revenues. This was a slightly better result than analysts expected.

Net cash increased from £410mn to £532mn. The forward order book value dropped from £2.1bn to £1.7bn.

Berkeley is targeting at least £975mn of pre-tax profit over the next two years, with £525mn expected in the coming year.

Berkeley plans to develop and rent out 4,000 homes in London. The 10-year project aims to take advantage of the strong rental demand in the London area.

The board proposes a 33p per share ordinary dividend and a 174p special dividend for the year just ended. Looking ahead, the group plans to return £283mn from 1 Oct 2024 – 30 Sep 2025.

The shares fell 1.5% in early trading.

Our view

Berkeley’s full-year results were good enough. But markets got a little jittery about new plans to build and rent 4,000 homes in London over ten years. In theory it makes sense, 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 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. 80% of the planned sales for the coming 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. 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.

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