A reliance on the London housing market has not worked in Berkeley Group's favour this time, but it is confident the boom times will return.
Berkeley Group’s (LSE:BKG) heavy exposure to London has been both a blessing and a curse, although the company remains convinced of recovery in the capital.
The effects of the pandemic on the London market put pressure on its traditional home buyers, where there is a broadly even split of owner-occupiers and (overseas) investors. With international travel restrictions muddying the picture, let alone the aftermath of Brexit, this core market for the group has been under pressure.
Despite these developments, the London market remains one where there is strong undersupply, and Berkeley remains committed to its presence. There is a clear debate on the lasting effects of the pandemic on city life, as some buyers have chosen to move to more rural areas and as the requirements for commuting have significantly reduced. By the same token, London has its own idiosyncratic attractions which the group believes remain intact. Indeed, London enquiry levels are currently higher than those seen in pre-pandemic times.
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The value of sales reservations overall had previously been flagged as being 20% lower, which raises further questions on the general market. However, forward sales of £1.7 billion are largely in line with previous years (2019 was £1.9 billion and 2018 £1.8 billion), with an uplift of 4% in homes sold at an average price of £770000, as compared to £677000 in the previous period.
Such has been the careful management of the situation, pre-tax profit rose by 2.9% over the year, underpinned by a revenue increase of 14.7% to £2.2 billion, both of which were marginally ahead of expectations. Berkeley’s financial standing also remains strong, with net cash of £1.1 billion and access to a revolving credit facility of £450 million if it were required.
This has enabled Berkeley to plough ahead with a shareholder returns programme which has risen by 19%, through both share buybacks and a dividend which currently yields 2.5%.
The fly in the ointment for Berkeley from an investment perspective has been the heavy reliance on London. While the share price has added 5% over the last year, this is a shadow of the rally which many other housebuilders have enjoyed given the generally supportive environment, and compares with a hike of 12% over the period for the wider FTSE100 index.
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However, given the company’s upbeat outlook, particularly over the longer term as future gross margins are set to show strong improvement and alongside increasing shareholder returns, the current market consensus of the shares as a 'hold', albeit a strong one, could well be subject to upgrades.
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