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Berkeley - reservations fall 35%, full-year guidance maintained

Berkeley's underlying private sales reservations fell by 35% in the four months to the end of August.

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Berkeley's underlying private sales reservations fell by 35% in the four months to the end of August. Pricing remained resilient which the group attributes to the tight supply of homes on the market.

Forward sales are expected to be around £2.0bn at the end of October 2023. Net cash position is also expected to be around £325m at the same point, down from £410m in April.

Berkeley reiterated its guidance for £1.05bn of pre-tax profits across the coming two financial years, weighted slightly towards the current year.

The group plans to deliver another £282.7m of shareholder returns by 30 September 2024 through a combination of dividends and share buybacks.

The shares were broadly flat following the announcement.

View the latest Berkeley share price and how to deal

Our view

Berkeley delivered a reassuring update covering the first four months of the financial year. The group reaffirmed its profit guidance for this year and next, despite the housing market sitting on shaky ground.

But recent interest rate hikes are pushing up mortgage costs and causing a relative lack of urgency among buyers, with private sales reservations falling 35% as a result. Until there's more certainty about the direction of travel, potential buyers will continue to be hesitant to sign the dotted line. That's underpinning the expectation for sales to be 20% lower this year, so controlling costs and maintaining margins will be a key priority from here.

Berkely's already taking action to improve its financial resilience. Supply is being carefully matched with demand and spending on new plots of land has stopped. Regardless, net cash is expected to be around £325m by the end of October, down around 20% since April. The prospective 5.5% yield is a key attraction for investors. But if cash resources get stretched further, spending priorities are likely to change and we could see the dividend take a back seat. Remember no dividend is ever guaranteed.

The regulatory environment continues to be called out for creating uncertainty and delays in the housebuilding process. The resulting planning issues still need to be solved as they're creating bottlenecks in Berkeley's development pipeline.

But ultimately, Berkeley's putting in a relatively resilient showing.

The order book's standing strong at around £2bn, with 90% of revenue this financial year already secured. That provides a strong foundation to weather challenges in the near term. But if reservation levels remain depressed the order book could quickly diminish. This in turn could mean a lag between any recovery in the housing market, and a return to growth for Berkeley.

The group's London focus, and higher-end product with an average sale price of £608,000 at the last count, means it offers something different to the other large builders. Many of its sites are technically challenging, and that's afforded it enviable margins in the past. Whether or not this exposure to more exclusive property proves to be an advantage going forwards depends on how the economy evolves.

Domestic and international demand in the key London market remains robust and the housing supply shortage doesn't look to be going away anytime soon. That's helped to keep sales prices resilient despite the slowdown in the housing market. Cancellation rates have normalised and build cost inflation looks to have peaked too, which will provide a welcome relief to margins.

With its higher-end focus, Berkeley offers something different to the broader sector. That's resulted in a premium price-to-book valuation compared to peers, which is justified in our eyes. But keep in mind that near-term challenges remain and this is reflected in Berkeley continuing to trade below its long-term average.

Berkeley key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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 disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 8th September 2023