- High-end house builder cuts profit forecasts by 30% across next four years
- FTSE 100 member cites planning, regulation, land costs, and higher interest rates
- Berkeley’s implied cut to completions will worry the government in the wider context of its housebuilding targets
- Berkeley shares hit lowest mark since 2017
- Management’s plan to run further share buybacks suggests they feel the shares are cheap (and they do trade below book value)
“It may be 1 April but Richard Stearn and the management team at high-end housebuilder Berkeley Group are nobody’s fool and when they speak it is always worth paying attention, because their experience covers a good few housing cycles,” says AJ Bell investment director Russ Mould.
“The FTSE 100 index member is cutting profit forecasts for 2027 to 2030 by some 30% thanks to higher interest and mortgage rates, in the wake of the war in the Middle East, but also the increasingly onerous regulatory and tax environment for housebuilders.
“That leaves the shares at their lowest level since early 2017.
Source: LSEG Refinitiv data
“Berkeley now suggests that high land prices and longer planning cycles are also burdens on its planned build-to-rent and brownfield land regeneration projects. As a result, it is reviewing the timing of the development of its current batch of six build-to-rent sites and pausing on the purchase of any fresh land.
“Former boss Tony Pidgley was a master at timing market cycles and executive chair, Rob Perrins, and Mr Stearn, both worked with him, after joining Berkeley in 1994 and 2002, respectively. Mr Stearn may have left briefly, between 2011 and 2014, but both executives will be imbued with Berkeley’s culture and approach to its target markets.
“Berkeley still expects to generate some £450 million in pre-tax profit in its financial year that ends this month. But the more cautious approach to development and building, coupled with a less rosy macroeconomic environment than management had been expecting, means the company now expects to generate £1.4 billion in total pre-tax income across the next four years, out to 2030.
“That compares to analysts’ forecasts of cumulative earnings of nearly £2 billion across that period and implies an annual profit run-rate of some £350 million a year.
“This is a long, long way below the halcyon days of zero interest rates and low mortgage rates that prevailed in the late 2010s, when Help to Buy gave the wider housing market a boost, even if Berkeley’s average selling prices meant it was not really a beneficiary of that particular scheme.
Source: Company accounts, Marketscreener, analysts' consensus forecasts. Financial year to April.
“Intriguingly, Berkeley suggests it still expects to generate an operating margin between 17.5% and 19.5% across the 2027-2030 timespan.
Source: Company accounts, Marketscreener, analysts' consensus forecasts. Financial year to April.
“The cut to profit expectations therefore implies a cut to forecasts for housing completions.
Source: Company accounts, Marketscreener, analysts' consensus forecasts. Financial year to April.
“Berkeley is far from the biggest housebuilder in the UK by volume, and its average selling price, brownfield regeneration specialty and geographic focus means it may not be entirely representative of the wider industry. Even so, the Labour government’s target of building 1.5 million homes is not going to be helped by Berkeley’s forecast of lower volume sales, and it will look all the harder to achieve if other housebuilders start to think the same way.
“Investors are certainly taking an increasingly downbeat view of the housebuilders. Berkeley’s share price fall to nine-year lows is one sign of this, as is the overall derating of the quoted builders, who now trade at just 0.7 times tangible net asset, or book, value per share. Only Persimmon trades at one times or above, and then only just.
Source: Company accounts, LSEG Refinitiv data, Marketscreener, consensus analysts’ forecasts
“The old rule of thumb is that housebuilders can be cheap if they trade at less than one times book value and are expensive when they trade at two times or more.
“Just as rising interest rate expectations, and oil and gas prices, are puncturing the earnings expectations and valuations for builders, the opposite could yet hold true. Berkeley’s management seems to think the bad news is now largely in the share price, since the board is sticking to its plan to return £564 million in cash to shareholders by 2030.
“The sum is the equivalent of a fifth of the company’s stock market capitalisation and management is suggesting that share buybacks may represent more of the returns rather than dividends, at least if the share price stays below book value.
“This assertion may be providing a little support to Berkeley’s shares, which is up from the day’s initial lows, as a share buyback in effect means that the company is buying £1 of assets for 70p.
“Such a plan is a pretty quick way of creating value, and a safer one, unfortunately, than deploying that cash to build houses in the current environment.”
