Berkeley caught in investment hiatus

Berkeley Group Holdings (BKG) is unhappy. Upset about the demands from new legislation and building guidance, such as the Building Safety Act 2022, the FTSE 100 London-focused housebuilder said at the top of its results for the six months to 31 Oct it is "not currently investing in new developments due to the planning and regulatory environment".

There is nothing Berkeley can do about regulation other than lobby. Rather than getting caught up in externalities, a more positive move would be a shift in strategy, such as rival housebuilder Vistry's (VTY) decision to develop homes entirely for bulk sales to institutions buying for the rental market.

And while many regulations have changed over the last year, this has not stopped others from ploughing ahead. Vistry, as mentioned, is bullish about the future, and so is Grainger (GRI), which, like Berkeley, builds flats in central London. 

So, why is Berkeley in such a huff about "highly complex, uncertain and unpredictable" regulations by comparison? Likely because, while demand for the rental accommodation Grainger and Vistry build has soared, the house-buying market is sluggish. As the company notes further down in its results, the "sharp increase in interest rates" has dampened demand.

Analysts at Investec are forecasting BKG's dividend will rise next year before flatlining as earnings per share slump over the next two years. Berkeley's somewhat limpid approach and the weak future earnings prospects continue to make us bearish, especially at this price. By way of mitigation, if Berkeley does not recommence deployment of capital into new investment opportunities by 30 April 2027, the group anticipates returning around 100 per cent of the profit after tax earned over this period to shareholders. Sell.

Last IC view: Sell, 3,836p, 21 June 2023