Berkeley Group Holdings plc (BKG) ORD GBP0.056110477936

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Berkeley Group’s first half revenue grew by 7% to £1.3bn, as a 18% increase in completed house sales offset a shift towards lower priced properties.

Pre-tax profit fell 7.7% to £275mn. The increased revenue and an improvement in operating margin couldn’t fully compensate for a fall in contribution from joint ventures.

Free cashflow more than doubled to £181mn reflecting lower inventories and the impact of the timing of payments. Net cash was down by 11% to £474mn following a sharp uplift in returns to shareholders to £242mn. There’s a further £260mn set aside for dividends and buybacks to be paid out by September 2025.

Transaction volumes are around a third lower than those seen in 2023. However pre-tax profit guidance of £525mn for the current year and at least £450mn next year remains unchanged.

The shares fell 1.3% in early trading.

Our view

There were few surprises in Berkeley’s first half results. It’s also fleshed out some details around its longer-term plans.

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 £600,000, means it offers something different from the other large builders. Many of its sites are technically challenging, and offer a differentiated living experience. While the focus has shifted towards slightly lower priced homes, that’s not damaged profitability which is holding up well compared to historic levels.

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 £1.5bn order book remains a key strength of the group, helping to underpin 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, with levels of agreed sales still falling short of those seen last year.

Berkeley has taken steps to enhance financial resilience by aligning supply with demand and curbing spending on new land. Despite this, £2.5bn has been allocated for land acquisitions over the next decade, which should be funded by free cash flow, reflecting confidence in the long-term housing market - a view we share given strong structural demand.

Even with this investment, Berkeley anticipates generating enough cash to return £2.0bn via dividends and buybacks over the same period. But the pivot to Buy-to-Rent presents cash flow risks worth monitoring and there are no guarantees.

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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