ii view: London focus causes Berkeley Group shares slump

Despite robust recent growth among rivals, performance here looks more pedestrian. We assess prospects.

Trading update from November to 28 February

• Continues to expect a similar £504 million profit to that made last year 
• Anticipates a one fifth fall in the value of reservations year-over-year

ii round-up:

London and South East focused housebuilder Berkeley Group (LSE:BKG) reported an anticipated one-fifth fall in the value of reservations over the current financial year as it delayed opening sites due to virus lockdowns.

The group, which sells many of its properties to travel hit overseas buyers and investors, did however reiterate its expectations for a similar current year pre-tax profit to the £504 million achieved last year. 

Berkeley shares fell by more than 5% in UK trading, leaving them up by around 10% over the last year compared to gains of over 30% for larger rivals Persimmon (LSE:PSN) and Barratt Developments (LSE:BDEV). 

Given the slowdown in reservations, end of year forward sales are expected to be above £1.7 billion. That compares to last year’s £1.9 billion and 2018’s £1.8 billion. 

Group net cash is forecast to be around the £954 million level reported at the half year results. Pricing had proved stable although management summarised the current environment as “volatile” given both continued national lockdowns and the ending of the Brexit transition period.

Onsite labour numbers remain above pre-pandemic levels and, despite some materials delays and price increases in specific areas, the overall impact on build costs had been broadly neutral.

The builder of large complex regeneration sites reiterated its commitment to returning £280 million per annum to shareholders through either dividends or share buy-backs.

ii view:

Berkeley’s track record and prudent business model have helped give it something of a revered reputation among investors within the housebuilding sector. Founder Tony Pidgley, who sadly died last year, has arguably been the dominant force behind its revered status, regularly calling the ups and downs of the property market. 

A strong presence in London has left Berkeley more subject to international buyer and property investor considerations. Reservations may have suffered given continued international travel restrictions and Brexit uncertainty. 

For investors, Berkeley has often created opportunity out of difficulties, buying land in the aftermath of the financial crisis for example. Shareholder returns remain a focus, with returns of £280 million per year made to shareholders through either dividends or share buy-backs since 2016. But the differing nature of its customers compared to the more traditional buyers of other housebuilders looks to have hindered it. For now, investors may decide to wait for firmer evidence of recovery. 

Positives: 

• An industry revered track record
• A commitment to shareholder returns

Negatives:

• Profit fell 35% over its last full-year
• Both Covid-19 and Brexit offer ongoing uncertainty

The average rating of stock market analysts:

Strong hold