Housebuilder Berkeley Group PLC (LON:BKG) is a class act but Barclays sees better value elsewhere in the sector.
These are challenging times for Berkeley, Barclays asserts, with the higher end of the London market slowing down since the EU referendum vote.
The company gets little boost from the government’s Help to Buy programme, which is targeted at the cheaper end of the market, and recent Stamp Duty changes have been unhelpful to Berkeley, if not to Her Majesty’s Treasury.
London's pre-eminent builder
On the plus side, Berkeley retains its aspirational brand as “London’s pre-eminent house builder”, while its strong balance sheet means it is always ready to buy land when prices look attractive.
That balance sheet strength has enabled the company to start buying back shares, which clouds the dividend story slightly, in Barclays’ view.
“Though enhancing the company’s flexibility, the quid pro quo is that it clouds the previously gin-clear dividend policy. Based on our assumptions, the dividend yield is 3.8% in 2019E, though this should be considered in addition to the benefits of share buybacks,” Barclays said.
Barclays pours cold water on the notion that Berkeley would use its cash pile to buy out struggling competitor, Bovis Homes PLC (LON:BVS).
“Berkeley has no history of doing major M&A deals, has a skill set much more skewed towards higher density/higher rise production (Bovis Homes is a regional house builder with no operations in the capital) and largely exited regional house building when it disposed of Crosby Homes back in 2005,” Barclays noted.
Berkeley recently revealed 45% of its buyers are from overseas, and of those around 30% are owner-occupiers.
Barclays calculates around 37% of properties sold by Berkeley are to investors, rather than people trying the novel approach of buying a residence so they can reside in it.
The government has introduced a number of measures recently designed to cream off some of the exorbitant returns to be earned from the London housing scene, and it will take some time for these changes to work their way through the system, after which we will see the “new norm”.
Investor market is far from dead
Barclays believes the investor market is far from dead, and there is a possibility that the government could dilute the 3% Stamp Duty premium in the next budget, particularly given its improved tone towards the private rented sector under the new leadership.
“We see the Theresa May-led government as less concerned about home ownership per se and more with increasing supply across all tenures, a more pluralistic approach,” Barclays said.
On a price/earnings ratio of just 8.7, the shares are not expensive, but with London seeing a sharp drop in the volume of house sales and a muted drop in prices, Barclays goes no further than a neutral “equal weight” rating.
The price target has been raised 14% to 3,175p from 2,790p.