- Shares fall 6.6% despite strong profit growth
- Investors fear rising rates will crimp demand
- Firm commits to further cash returns in medium term
Shares in Berkeley Group (BKG), one of the UK’s premier house building firms, dropped 6.6% to £35.42 after the publication of its full year results, taking them close to their lowest level since the pandemic driven market sell-off in 2020.
In spite of a 23% jump in earnings per share and a return on equity of 17.5%, investors shunned the shares fearing further interest rate rises will hurt demand for new homes.
STRONG RESULTS
Chief executive Rob Perrins said the firm’s results for the year to April reflected ‘the stability of our uniquely long-term operating model throughout an exceptionally volatile period’.
‘They are underpinned by our portfolio of major brownfield regeneration projects, where patient and sustained investment is transforming disused land into distinct and highly sustainable mixed-use neighbourhoods within the UK's most undersupplied markets’, Perrins added.
The group has invested £4 billion in its development activities in the last two years and has £8.3 billion of estimated future gross margin in its land holdings, meeting its £7.5 billion target three years early.
Investments included the acquisition of the remaining 50% of St William for £412.5 million, giving the firm full control of 24 sites with the potential to deliver over 20,000 new homes.
Having achieved its target early, Berkeley said it would now only acquire new land ‘very selectively’, meaning more surplus cash could be returned to shareholders.
INVESTOR NERVOUSNESS
The firm said it had had a ‘stable’ start to the new financial year with the value of underlying reservations up 25% on last year, slightly ahead of pre-pandemic levels, and it was passing on cost increases through higher selling prices.
Even so, with inflation now running at a 40-year high of more than 9%, the Bank of England is under growing pressure to raise interest rates which will reduce peoples’ spending power.
While there is undoubtedly still a shortage of good quality, fit for purpose housing, sales rely on buyer confidence which is being eroded by higher borrowing rates and the cost of living crisis.
SHAREHOLDER RETURNS
Thanks to its high return on equity and tight cost control, Berkeley generates large amounts of cash and expects to post pre-tax earnings of around £600 million this year and £625 million in each of the following two years.
It has already committed to pay out £282 million per year in ‘ongoing shareholder returns’ up to September 2025, and today it committed to returning more surplus cash ‘over and above the current annual scheduled payment to shareholders’ from mid-2025.
At the current price the shares are yielding close to 10%, while the firm is buying back another £77 million of shares between now and the end of September, which will further enhance returns.