Berkeley's building boom is over

Berkeley Group Holdings will report its half-year figures on Friday 5 December. Dealers are on the lookout for an indication of a slowdown.

Houses in a row
Source: Bloomberg

Berkeley’s balance sheet has been benefitting from the booming housing market but the figures have not translated into similar success for the share price this year. In June, the homebuilder revealed a 40% jump in full-year profits. The number of new homes sold over the period was 3742 which was a fractional increase on the year, but it was still 30% more that the pre-property market slump level in 2007.

It is worrying on two fronts; firstly it is a considerable increase in new homes built compared with the last housing boom, which wasn’t that long ago, and secondly it suggests that demand is starting to plateau.

There has been talk in the property sector that we are entering a phase of more measured growth. During the summer, Mark Carney vocalised his concerns for the surge in property values. The Bank of England now has the power to implement tighter lending policies for high value mortgages, and since Berkeley’s homes are at the higher-end of the housing scale the company is more likely to be impacted by any future tougher lending criteria.

Sticking with the banking theme, traders are pencilling in a rate rise from the BoE at the back end of the 2015. If the share price of the homebuilder is starting to cool off now, what will it be like when a rate hike is nearly a reality? The Autumn Statement has revealed that the vast majority of home owners will pay less on stamp duty but some of Berkeley’s high-end clients may not reap the benefit.

In December 2013, Berkeley posted a first-half profit of £169.5 million which was a 19% increase on the year. Any indication that the growth rate is slowing could lead to a round of selling.

Berkeley will announce its full-year figures in June 2015. The consensus is for revenue of £1.87 billion and adjusted net income of £366 million, which equates to a 15% and 25% increase on last year’s respective figures.

Equity analyst are bullish on the company. Out of the 17 recommendations, seven are buys, nine are holds and one is a sell, with the average target price of £27.59. This is nearly 8% above the current price. Having 41% of the ratings attached to the stock as buys seem bullish but when you compare it to others in the sector it is less impressive. Taylor Wimpey is more typical of the homebuilders as 77% of the recommendations are buys. Added to that, the average target price is 20% higher than the current price.

Year-to-date, Berkeley is down 3.2%. Taylor Wimpey is up 12.6% over the same period, and the household goods and home construction sector is up 10.2% year-to-date. However, it is worth noting that Reckitt Benckiser accounts for 61% of the sector. Berkeley is one of the few UK homebuilders to post a negative return throughout 2014.

Since the record high of £28.09 in February, the stock has struggled to retake it. As the price has failed to close above the August high of £25.87, it could be on be on track to the 200-day moving average of £24. 

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