Berkeley Group battens down the hatches

Its shares are down 22% in 2022 and this half-year update reveals why, but Berkeley Group could be protected from the worst of any housing slowdown. Our head of markets explains. 

Berkeley Group Holdings (The) (LSE:BKG) is battening down the hatches in view of a tightening economic environment, but remains supported by its exposure to London and the South East.

Following a host of activity, the group is now looking to generate value from its existing assets, with the likelihood of limited new investments. The bar for any such acquisitions has been set high and includes the additional taxes and levies on the industry which will inevitably crimp margins, meaning that Berkeley is likely for the time being to only purchase on an exceptional basis.

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Should such opportunities arise, the group is well placed with the financial flexibility of £343 million of net cash, which has increased from £269 million as the company continues to benefit from monies due on previous investments. In these results for the six months ended 31 October, Berkeley said forward sales have also nudged higher to £2.3 billion from a previous £2.2 billion, while perhaps of equal importance is the group’s estimate of future gross profit on its land holdings, which currently stands well in excess of £8 billion.

The robust financial position has also enabled the continuation of its shareholder return programme. Although the overall implied yield is around 7%, most of this is coming from share buybacks as opposed to a dividend payment, resulting in a yield of under 1% which is of little attraction to income-seeking investors.

Given the mix in properties being sold which includes affordable homes, the average selling price has been reduced but still stands at £560,000, representing activity in London and the South East, which Berkeley believes to be the country’s most under-supplied market. At the same time, the prospects for the capital remain largely intact, and the group previously pointed to the recent opening of the Elizabeth Line as being likely to have a positive impact, noting an uplift in properties along the line in London and the Thames Valley.

Despite the increased economic pressures, which have heightened over the last five weeks or so, the numbers for the half-year have held up reasonably well. Revenues declined by just 1.6% and pre-tax profit by 2%, and the guidance is unchanged, with full-year profit likely to come in at around £600 million. Further out, the group is estimating that build cost inflation will begin to moderate next year, although pre-tax revenues are also likely to show a decline to £1.05 billion, from the current £1.25 billion.

Potential problems are sector-wide, however. An increasingly toxic combination of persistent inflation, the propensity of consumers to buy given the tightening economic environment and a rising interest rate environment which puts further pressure on affordability, have all weighed.

In turn, should this filter through to lessening demand, any decline in average selling prices would put further pressure on margins, while supply chain constraints and a generally dour outlook on UK economic prospects complete the mix.

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As such, the sector as a whole is deeply out of favour at present, and although in relative share price terms Berkeley has outperformed its peers, the shares have nonetheless fallen by 20% over the last year, as compared to a gain of 2% for the wider FTSE100.

Even so, the company’s reliance on London and the South East could provide an edge, especially in more testing times elsewhere, such that the market consensus of the shares remains at a buy.