Berkeley aggressively defends house-building rate, maintains profit guidance

Berkeley Group reported a resilient level of house sales in the past four months and while it was confident enough about the "compelling" fundamentals of the London and South East housing market to maintain profit and dividend guidance, had a fairly aggressive message for the government.

Although sales in the second half have been above business plan level, the FTSE 100 housebuilder blamed its inability to increase production beyond this level due to factors outside its control: high transaction costs, the limits on income multiples for mortgage borrowing and prevailing economic uncertainty.

In a somewhat political trading statement, which comes as the government carries out an investigation into the gap between the amount of land housebuilders own with planning permission and the rate of completed new homes coming onto the market, Berkeley also blamed domestic buy-to-let investors having been impacted by additional transaction costs and the removal of interest deductibility.

The group expects forward sales above £2.0bn at 30 April 2018 and said "this resilient position, coupled with its well-located sites and strong balance sheet" gave it confidence to reaffirm its guidance for at least £3.3bn of pre-tax profits for the five year period to 30 April 2021, with £1.5bn in the current and next financial years, weighted approximately 60% towards the current financial year.

"The fundamentals of the market in London and the South East remain compelling, but the operating environment and its impact on transaction volumes, whilst sufficient for the business plan and five year profit guidance period that ends at 30 April 2021, do not support the step-up in Berkeley's production levels that these markets so badly need.

"Our focus is on ensuring we achieve the right planning consents on our long-term regeneration sites, and then working with our partners and stakeholders to bring these through into production."

The company, which said it was remaining "cautious" in its investment strategy and acquiring land selectively, guided towards cashflow being "broadly working capital neutral" over the year as a whole, leaving net cash above the half year position of £632.8m by the year-end.

Analyst Robin Hardy at Shore Capital suggested the warnings about the market were rather undermined by the company's stable profit and dividend guidance.

"There is often an attack on the tax and duty infrastructure impacting on the group’s markets but the tone of today’s statement is more aggressive than usual and could even be taken as indicating that the market climate is getting noticeably tougher, although that does not square with the stable guidance," he said.

He suggested the share price and many analysts' target prices "seem to be based on the assumption that Berkeley might somehow be able to sustain those higher levels".

The analyst, who sees fair value of 3350p for the shares, added that "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".