Berkeley Group (LON:BKGH) posted underwhelming first-half figures today as it seems the boom times in terms of profits are over in the housing market.
Revenue in the six month period dropped by 43.7%, while profit before tax fell by 31%. Average selling prices fell by nearly 13% to £644,000 – would could be a reflation of the fact the group is diversifying its portfolio away from London. The number of new homes sold in the first-half fell by over 30%. These figures paint a picture of cooling in the house building sector. Political uncertainty on account of the UK’s planned exit from the EU, combined with high levels of personal debt has prompted some potential house buyers to hold-off purchases. On the bright side, gross margin improved to 36.1% from 29.2%, which is impressive in the current environment. The firm also maintained its medium-term profit guidance despite today’s not-so hot numbers.
Berkeley Group’s share price has undergone an impressive run in recent months, thanks in part to an optimistic update in September, as well progress on the Brexit front. Nearly three months ago the house builder confirmed that demand for properties in London and the south east was robust, but it is also making a concerted effort to diversify its operations. The group has developments in Sevenoaks, Winchester as well as Birmingham. The aim is to reduce its reliance on the greater London area. HS2 is still a widely debated subject, but should it get the go-ahead, it could assist the group’s Birmingham operation.
The UK property market has had the Brexit coul hanging over it for years now, and in June when Berkeley announced that full-year profit dropped by 20%, there was a feeling the firm was beyond peak earnings, and that was reflected in the share price. When it was revealed in October that Boris Johnson struck a deal with the EU, it boosted the pound as well as the Berkeley Group share price. Mr Johnson’s Conservative party are comfortably in the lead in the opinion polls, which has assisted the stock price.
The markets are pricing in a Tory victory at the general election next week. Seeing as all the Conservative candidates contesting the election have pledged to back Boris’ Brexit deal, there is a feeling the UK will have a smooth departure from the EU too. Traders are terrified by the prospect of a no-deal Brexit, but that outcome seems very unlikely with the way things are going. There is also a belief in some pockets of the markets that once the Brexit uncertainty has been lifted, investment funds will flow into the country – provided Brexit is handled in an orderly fashion.
At the four-month update in September, the company predicted it will post £3.3 billion in pre-tax profit over the six years until April 2025, so things are still looking positive in terms of the bottom line. That outlook was reiterated this morning, which should assist investor confidence. The house builder is known to be generous to its shareholders, and £149.8 million will be returned to investors via dividend plus share buybacks in the past six months.
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