The key takeaway for investors from Berkeley’s (BKG) latest trading update is the company’s comment that it can’t justify ramping up production of new homes.
Shares in the London and South East focused housebuilder fall 4.8% to £37.34 on the news and several of its peers are struggling too with Barratt Developments (BDEV) falling 1.3% to 529.2p and Bellway (BWY) down 2.1% at £30.63.
It should come as no surprise that Berkeley’s views are influential given chairman Tony Pidgley’s ability to call the housing market.
AJ Bell investment director Russ Mould says: ‘For several years his sector has enjoyed advantageous conditions; it was building homes on land bought cheaply in the wake of the financial crisis, low interest rates made mortgages available for an increasing number of buyers and Government policy has been supportive.
‘Today Berkeley warns that despite “compelling” fundamentals, the operating environment does not support a step-up in production levels. This follows a warning in December that the current financial year would see profit reach its peak level.’
THE DETAILS
Berkeley does reiterate guidance for £3.1bn of pre-tax profit in the five years to April 2021.
It blames several factors for its inability to step up its building plans. These include home moves and downsizers being hit by high transaction costs, a four-and-a-half times income multiple limit on mortgage borrowing and economic uncertainty.
It also notes buy-to-let investors which it says ‘buy early in the cycle and provide security of cash flow to enable complex, capital intensive developments to be brought forward’ are being held back by additional transaction costs and regulatory changes and adds its usual grumble about the planning environment.
Shore Capital analyst Robin Hardy comments: ‘There is no need to change forecasts for the near term or to alter the expectation that Berkeley is moving from making profits of £800 to £900m to making £500 to £600m. However, the valuation and many observer's target prices seem to be based on the assumption that Berkeley might somehow be able to sustain those higher levels.
‘The reaffirmation of the guidance and the clear indication that the board does not believe that the market climate will allow it to outperform that guidance is likely to prove a disappointment for the more bullish followers of the group.’
