Berkeley bears

London's Housing Market Is Still a Money Machine

Bears targeted Berkeley before the vote to leave the EU. They were wrong.
Photographer: Chris Ratcliffe
BERKELEY GROUP HOLDINGS/THE
+4.00
At Closing, January 23rd
4144.00 GBp

Punters who wanted to bet against Britain in the run-up to the Brexit vote thought they'd found the perfect target in Berkeley Group Holdings Plc, a London-focused homebuilder partly reliant on inflows of foreign capital to purchase it's very expensive homes. Throw in a government decision to increase property transaction taxes and penalize purchases of buy-to-let homes, and you had a seemingly watertight bear case. It's turned out wrong. 

On Friday, Berkeley published remarkably healthy sixth-month figures. Sales jumped 14 percent, while pretax earnings rose 36 percent, compared to the same period a year ago. Looking ahead, the company raised its five-year profit forecast by 10 percent. The shares soared, extending a rally from the post-referendum nadir to 85 percent. 

Priced for Perfection

You wouldn't know London house prices are falling from Berkeley's figures

Source: Berkeley

When a homebuilder starts generating a return on equity in excess of 35 percent, 1 you can be forgiven for assuming it's been juicing returns with piles of debt, or is making hay from government subsidies (like some of its peers). Neither is the case here. Berkeley doesn't benefit as much from the UK's notorious Help-to-Buy loan program, and has hardly any borrowings. Net cash reached 633 million pounds ($852 million) at the end of October.

House Party

Berkeley Group's returns on equity are among the best in the business

Source: Bloomberg and Gadfly calculations based on latest filings

True, this could be as good as it gets. Berkeley's average selling price climbed 10 percent to an eye-watering 719,000 pounds because it happened to sell a lot of particularly expensive sites during the period. Having acquired plenty of cheap land after the financial crisis, then slowing down these purchases, earnings and cash flow have both been propelled higher. Analysts polled by Bloomberg expect Berkeley's earnings to peak next year.

For the time being, it's a money-printing machine. And, thanks to that un-geared balance sheet, it can afford to return plenty to shareholders. The stock yields 5 percent based on Berkeley's target to return 2 pounds a year for each share. 

London Penalty

Berkeley's shares have recovered since the Brexit vote but some peers have fared better

Source: Bloomberg

While its order book has declined to about 2.5 billion pounds (slightly less than a year's worth of estimated revenues) and reservations are still 10 percent lower than in fiscal 2015/2016, that's not too bad considering Britain has been engaged in national self-sabotage for much of the past year. The country's housing shortage, low interest rates and weak currency -- which makes it cheaper for foreigners to buy a London property -- all remain supportive. The Brexit bears need a new whipping boy.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Trailing 12-month earnings divided by the average of shareholders' equity at beginning and end of the period.

To contact the author of this story:
Chris Bryant in Berlin at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net

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