Berkeley Group looks undervalued despite London property market slowdown

Robert Stephens discusses why the prime housebuilder could offer good value for money following its recent results.

Last week’s results from prime housebuilder Berkeley Group (LSE:BKG) showed that the operating environment in London and the South East continues to be challenging.

The company’s pre-tax profit of £775.2 million may have been at the top end of expectations, but it is 21% lower than the figure achieved in the previous year.

Still, the company anticipated this slowdown a couple of years ago. It is 18% up on its guidance to deliver £3 billion of pre-tax profit in the five years to 2021. Therefore, its capital return plan remains firmly on track, with it expected to return £2.16 per share per year through a mix of dividends and buybacks through to September 2025.

Market outlook

The uncertainty surrounding the prospects for the UK economy seem to be weighing on London’s property market. New housing starts in the capital are 30% down on their 2015 peak, and are currently less than a third of the draft London Plan target of 66,000 homes per year. While this is stifling the company’s prospects on the one hand, a lack of supply is supporting higher prices than expected.

The political and economic uncertainty that is holding back the company’s performance is likely to continue in the short run. Likewise, factors such as mortgage restrictions, in terms of income multiples and mortgage offer periods, and high transaction costs are set to remain in play over the medium term. This is expected to contribute to a further fall in pre-tax profit of a third in the 2020 financial year.

Investment appeal

Despite a challenging outlook for the business, it appears to offer investment potential. The stock market seems to have factored in its forecast fall in earnings in the current year. Using 2020’s expected EPS figure of 322p, the stock trades on a forward P/E ratio of 11.2. Its 18.9% rise in net asset value per share in the 2019 financial year means that it has a P/B ratio of 1.5. These figures suggest that it offers a margin of safety at a time when the political and economic outlook for the UK is highly changeable and very unclear.


With a net cash position of £975 million, Berkeley’s balance sheet is relatively strong. It has a dominant position in the London property market, with it delivering more than 10% of the city’s new private and affordable homes in the last year. Therefore, it could be well-placed to capitalise on a recovery for the London housebuilding market over the long term.

Outlook

With it having added 14 new sites to its land bank comprising 8,700 new homes in the last year and having received nine new planning consents in the last 12 months, its future prospects appear to be bright.

Although in the near term it may suffer from a weak operating environment and further economic uncertainty as Brexit reaches its conclusion, its valuation and long-term outlook suggest that it offers investment appeal.