What can we read into the trading update from Berkeley Group Holdings PLC (LSE:BKG) that might have implications for the wider housebuilding sector, with Barratt and Vistry also reporting this week.
The top line was that it expects to meet its profit forecasts for the current and next financial year, but there was more nitty gritty in the statement – not all of it so benign.
Cost pressures
On the bad side, Berkeley warned that “the operating environment remains volatile”, with cost inflation running at 5-10%.
Last month, fellow FTSE 100-listed builder Persimmon put cost inflation at 8-10%.
Housing market demand
However, Berkeley, like Persimmon, said it was seeing a “good level of demand”.
The solid demand, it said, provided enough support for house prices to be kept above “business plan levels”.
In other words, across all its developments, it can sell houses and flats at average prices that more than cover overall cost increases.
This, suggested analyst Russ Mould at AJ Bell, “could suggest the quality of the housing stock gives it at least an element of pricing power in an uncertain market.
“Or, less positively, it could imply that Berkeley is yet to feel the full force of rising mortgage costs and cost-of-living pressures on demand.”
The longevity of this pattern is a question mark for Berkeley, said analyst Sophie Lund-Yates at Hargreaves Lansdown.
“Its south-east focus, and more premium product, means starting prices for a Berkeley home are significantly more than for run-of-the-mill developers.
“On one hand, this makes the group more vulnerable to a prolonged recession, as a £700,000 family home in the commuter belt is precisely the sort of thing people put off committing to when things are rocky.
“At the same time, these higher earners are less likely to feel the worst of the affects of a crisis, so may well prove to be a more reliable customer base.”
Cash and shareholder returns
It also means profits are on track and that it has no problems confirming its lavish long-term shareholder return programme.
Net cash at the half-year stage is anticipated to be “at a similar level” to the £269mln at the last April year-end and cash due on forward sales rates is expected to be “marginally” ahead of the £2.17bn level reported in April.
It had already announced last month that a dividend of £23.3mln, or 21.25 pence per share, will be paid to shareholders on 9 September.
It has already spent almost £118mln on share buybacks, which together covers the half of the previously promised £282mln of shareholder returns every year to September 2025.
The next £141mln will also be a combination of dividends and buybacks, of which just over £38mln has already been spent buying back shares. The final dividend will be confirmed by the end of next February.
Land buying
Following up on previous statements in June about it being more selective on land buying, Berkeley reasoned that the rising operational costs were further leading it to be more selective in buying new land.
It is currently “ensuring each site has the most appropriate development solution reflective of prevailing requirements” and making sure new land “will only be added to the land holdings very selectively” (reinforcing a point it had already made in June’s final results).
In the past financial year the group had ‘organically’ increased its land holdings by £1.1bn and spent £413mln acquiring full control of 20,00 plots from its former St William’s joint venture with National Grid.
So at the end of April the company had land holdings consisting of 66,163 plots with an estimated future gross profit of £8.26bn, which it boasted at the time a land bank "unrivalled” in the sector.
The London market
Analysts at UBS noted that reservations in value terms in the first four months of the financial year have increased compared to last year, helped by overseas buyers.
“Reservations in London has been helped by strong overseas demand which has seen no signs of abatement.
“This may well be helped by significant depreciation of sterling. The domestic market is also good but less strong than the overseas market.”
This is less relevant to Berkeley than many of its FTSE 350 peers, who have a broader geographic focus.