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London falling? Berkeley doubles down on shaky market

Berkeley's results are impressive, but the forecast for the London housing market is not
London falling? Berkeley doubles down on shaky market
  • Pre-tax profits rise for third consecutive year
  • Rising construction costs present risk

What housing market downturn? Berkeley (BKG) does not look like a housebuilder worried about prices falling. In its full-year results, the London-focused luxury developer revealed a 42 per cent year-on-year surge in the number of homes it had delivered, boasting that it now accounts for 10 per cent of all housing delivery in the capital. It does not look like the company is slowing down, either, with 47,000 plots on 60 sites currently in production, thanks in part to its £412.5mn acquisition of the remaining 50 per cent share of St William, its joint venture with National Grid which it set up in 2014 to build homes on former gas sites.

The results seem to be rewarding its bullishness. Berkeley's cash due on forward sales has risen to £2.2bn from £1.7bn in 2021, while pre-tax profit, earnings per share and turnover have all grown for the second year in a row following their distinct plummet in the year of Covid-19.

Yet, while all of this is encouraging, none of it is a foolproof hedge against the period of sluggish growth which Savills is predicting for London house prices over the next four years. By 2026, it is anticipating just 5 per cent growth in the capital, compared with 13 per cent for the rest of the UK. Berkeley’s position as a housebuilder for the luxury end of the market does mean it is unlikely to be exposed to tenants worried by the cost of living crisis, but it is not insulated from the market entirely.

Rising construction costs could also buffet the company’s immense development pipeline. A House Builders’ Federation (HBF) survey for the March quarter found that 89 per cent of respondents considered the availability of materials a major constraint on development – the highest figure since the HBF started asking that question over 10 years ago. As a consequence of this, for the month of May, the S&P Global/CIPS UK Construction Purchasing Managers’ Index recorded the slowest growth in residential construction since May 2020.

Berkeley is trading at a 28 per cent premium to net asset value. While the upward moving figures in its results support this to an extent, the clouds over the London housing market suggest that this share does not represent the best value for money. Hold.

Last IC View: Hold, 4,869p, 8 Dec 2021

BERKELEY GROUP (BKG)  
ORD PRICE:3,593pMARKET VALUE:£ 4.00bn
TOUCH:3,593-3,597p12-MONTH HIGH:5,232pLOW: 3,490p
DIVIDEND YIELD:NILPE RATIO:9
NET ASSET VALUE:2,816pNET CASH:£263mn
Year to 30 AprTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20182.8497758790.1
20192.96775481119
20201.92504325118
20212.20518339116
20222.35552418nil
% change+7+7+23-
Ex-div:-   
Payment:-   
*A dividend for the six months to 30 Sep this year to be announced on 11 Aug