Stock in focus

Theo Wyld, Research Analyst

Price£29.38

52 week high yield£34.13-£20.15

Net yield6.60%

Hist / pros per8.1-7.1

Equity market cap£3,989m

Berkeley Group (Berkeley) is engaged in residential-led property development focusing on urban regeneration and mixed-use developments.

The Group is steered by the steady hand of Tony Pidgley, CBE. 

Pidgley left school aged 15 to form his own business in haulage and plant hire. Just four years later, he sold to Crest Homes and became a Building Director working underneath Jim Farrer. These two entrepreneurs fancied their chances on their own and split off to form Berkeley Homes in 1975. Following 10 years of considerable growth, the company achieved a full listing in 1985 as the Berkeley Group. 

The management team have since gained a national reputation as predictors of the UK property market, having called the last three cycles correctly, agilely winding down major operations into downturns.
 
Berkeley has a strong long term record of delivering superior returns off its highly priced, predominantly London and South Eastern base. Where they have been so successful is in taking on the tougher sites and adding value through their development expertise. 

UK housebuilders enjoyed a stellar 2015. A large part of this was down to bank funding levels being unavailable to the sector’s smallest competitors. This meant that land purchasing was relatively fluent and cost effective for the larger players – something that stands them in good stead in today’s environment. 

However, the start of 2016 saw a correction at the top end of the London property market caused by over development and increased Stamp Duty. Low commodity prices drove increased caution from high-end international investors adding to the downward pressure. 

That said, management had again been successful in de-risking the portfolio into a downturn. They have barely bought any land since 2014, unwilling to pay what they see as unreasonable rates. They are under no pressure to restart purchasing as they have built up a 10 year land bank. However, should an opportunity present itself for a reasonable price they would not be afraid to take advantage of their enviable balance sheet, sporting a net cash position. 

Clearly, the vote for Brexit threw a spanner in the works for the sector. The markets were poised for a Remain victory and listed UK property companies were some of the hardest hit by the surprise result to the contrary. The large players had circa 35% of their market capitalisation wiped out in the ensuing sell-off. Some confidence has since crept back into UK property with the first few months’ post-Brexit data showing resilience. 

Berkeley was left behind by the other housebuilders in the subsequent rally on concerns around their London-focussed portfolio. However, this decoupling was sharply reversed when the Group posted a strong set of HY-16 results in October 2016. Investors took comfort in the lesser degree of forward sales decline than feared, and the security of the healthy dividend. 

There comes a point at which sterling has fallen far enough to compensate the overseas investor for the added risk of buying in London. It is important to note that the top end of London property had already corrected significantly before Brexit risks were being taken into account – something I believe has been forgotten. If you are a prospective Chinese buyer looking for a way to park your wealth outside the country and away from the Government’s capital controls, then London could well be an attractive option. 

In January 2017, management announced the opening of a Birmingham division. This is the Group’s first expansion out of the South East for over a decade. That said, management do have experience dealing in the city and cite the ‘can-do’ attitude of the council, and the similar demographics to their core areas, as reasons for the expansion. I believe this to be a smart move to diversify into what appears to be a higher growth market, as well as placating those who believe London property to be on a downward spiral. 

There is a risk that should unemployment rise rapidly, the UK property market would suffer significantly. However, this seems unlikely with mortgage rates where they are and the outlook for the base rate where it is. It is hard to imagine a full-scale house price crash without the degree of forced sellers we saw in 2007/2008.
 
Looking through the shorter-term volatility, the UK property market still faces a supply / demand imbalance which plays into the hands of the housebuilders. Understandably, the Government is pushing hard for increased proportions of affordable housing, however, fundamentally the housebuilders will not take on projects for which they do not receive a decent return on capital. 

In conclusion, Berkeley Group pays a generous dividend which is defended by a strong balance sheet and the ability to pull back from buying land in tough times. Their forward order book totals almost two years’ revenues backed by deposits nearing 30%. The experience of management will be crucial when navigating any choppy waters ahead. ​

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