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Berkeley Group - Navigating through testing times

George Salmon | 6 September 2016 | A A A
Berkeley Group - Navigating through testing times

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Berkeley Group Holdings plc Ordinary Shares

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Berkeley Group has this morning released an interim management statement, covering the period from 1 May to 31 August 2016 prior to its Annual General Meeting today. The shares were relatively unmoved this morning.

There is no change to profit guidance, with the group still targeting £2bn of pre-tax profit over the three year period to 30 April 2018, as the group's forward sales provide good visibility over the next two years. The dividend plans also remain in place, with Berkeley looking to pay out £10 per share evenly over the 5 years to September 2021.

After a hiatus either side of the referendum, reservations have returned to the relative levels of the first five months of 2016, around 20% down on 2015 levels. The market has been affected by higher property taxes, uncertainty around the EU referendum, while Berkeley have deferred the release of new homes to the market.

Berkeley say that site visitor numbers are at similar levels to last year, while pricing has remained resilient and cancellation rates have normalised after a brief uptick in the immediate aftermath of the vote.

Our view:

Prior to the EU referendum, Berkeley were vocal in their stance that the UK should remain in the EU, which was understandable given the importance of the London market to the group.

With the UK's exit from the EU now confirmed, the UK economy looks to be facing a prolonged period of uncertainty, with some question marks appearing over London's property market too. Those who were clamouring to get on the market will now be more likely to sit on their hands rather than commit to house purchases, particularly if unemployment starts to rise.

However, just as other housebuilders have reassured investors recently, the comments in Berkeley's AGM trading statement, their first announcement since the vote, will have settled some investors' nerves.

After what the group describe as a 'hiatus' in reservations around the vote, trading has picked up. Cancellations and site visitor numbers are holding at normal levels, while reservation rates have improved.

Nonetheless, reservation rates are still 20% down on last year, and investors are none the wiser as to how much of this can be attributed to broader market conditions and how much is due to Berkeley having less homes available for sale just now. We feel that there is are still plenty of pages left in the Brexit chapter of the UK housing market story.

In the longer term, the UK still faces a major housing shortage, and for the time being at least, interest rates look likely to stay at all-time lows. These factors should support both the demand and affordability of housing.

Historically, Berkeley has traded on higher valuations than others in the sector, reflecting its record of generating high returns by successfully developing brown sites into prime London locations. Amid the current uncertainties, the shares are trading on a price to book ratio of 1.7x, well below their historic average.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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