The Berkeley Group Holdings Plc is an England based residential and commercial property development company. With six autonomous companies under its belt, it focuses on urban regeneration and mixed use-developments, and primarily operates in London, Birmingham and the south of England.
In the latest half-yearly report (for period ending October 2018), the company posted a good start to the year and this was reflected in the guidance which was increased for the full year: pre-tax profit guidance for the current financial year was increased by more than 5%. The outlook for the next two years remains the same and afterwards, the company foresees a gradual decline in profitability to 15%, in line with long-term targeted rate. The period saw the launch of five new developments - two in London and three outside the Capital. The company has also invested in 11 new sites, all outside London.
The cash with the company also increased to £859.7 million, up from April 2018: £687.3 million. Although this signals a resilient financial position, especially in the wake of economic and political instability, it also indicates lack of risk-adjusted investment opportunities. In fact, land not under development increased by more than 47% in the last six months. As a property developer, it is heavily dependent on macroeconomic conditions like interest rates, employment levels, and manufacturing and consumer confidence. Tightening labour market and subsequent increase in wages augur well for the company. However, it can also lead to increase in building costs and though the costs remain steady at around 4% per annum, the company remains aware of the risks presented by various Brexit scenarios. Record low interest rate may have had assisted in sustaining the market, but risks are increasing from reverse of course of action and can hugely impact short term financing and mortgage decisions. As reported in filings, “trading conditions and the value of new reservations in the period to 31 October 2018 have remained consistent with the previous 18 months”. This reflects the lack of urgency in market.
Brexit uncertainty has weighed heavily on the market and has crushed in confidence in the property market. London and Sothern areas are the worst affected by it, while these constitute key markets for the company. Fears over Brexit caused near stagnation in British house prices resulting in weakest growth in six years. However, it seems Berkeley has bucked this trend and its average selling price increased to £740,000 from £721,000 last year, reflecting optimal geographical and sectorial mix. Over half of London’s site labour comes from the EU, and the skills gap in England’s construction workers will increase further if the country leaves the EU without any plan in place to address this. Revenue is evenly distributed among owner, occupiers and investors. Unstable macro conditions can pose a significant challenge to demand from investors, affecting nearly half of total earnings. Demand from international buyers, which is more concentrated in London, is also coming under pressure, especially considering the slowing growth in China which is a big investor in property market. However downward pressure on Pound can induce buying from international investors.
Given the circumstances, the company remains buoyant about its prospects amid all the instability. It sees numerous opportunities in London and elsewhere as the market factors in the prevailing macro uncertainty. The current cash position as well as £1.9 billion in cash due from forward sales, which will be collected in three years, provide a strong backing for future expansion. The record low prices are a perfect environment for Berkeley to concentrate on “long-term operating model” and invest in new opportunities. The company is confident of the status it enjoys and foresees that it will remain attractive both internationally and domestically. The stock (BKG:LSE) of the group was seen to be trading at GBp 3,806.00 by mid-day trading session as at February 05, 2019.
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