Berkeley shares landslide as housing market constraints take a toll on production.
Berkeley shares landslide
Trading is in line with business plans and sales prices are above planned levels
In a very brief trading update this morning, Berkeley Group, the London and South East focused upmarket housebuilder, suggested that trading was in line with its business plans and that sales prices remained above planned levels. The group also highlighted how the market conditions in London are unchanged from the first half.
But Berkeley confirms production will be affected by transaction costs, mortgage limits and economic uncertainty
However, the statement had a negative tone regarding the state of the housing market which cited the constraints on people moving home due to high transaction costs, the limit on mortgage income multiples and the prevailing economic uncertainty. Activity from buy-to-let investors is also drying up as a result of the removal of mortgage interest deductibility. As a result of this, management have said that the Group will be unable to increase production beyond current business plans.
The market today has taken this as a fairly strong sign of caution, with the shares trading down by as much as 6% in early morning trading, and this negativity has spread to the rest of the sector this morning. Berkeley has stated that it will now be cautious on its land acquisition plan and preserve cash outflows. Despite this, the group still maintains its medium term previous targets on profits of £3.3bn for the five years to 2021 and noted that shareholder returns upheld.
We currently recommend Berkeley as a ‘hold’ for medium risk investors
Berkeley themselves have said that the limit to production will be a blow to the housing market because of the need for so many more homes. The London market has fared the worst since Brexit and, should this spill over to the rest of the market, then it will be a big blow to the government as limited production will do nothing to bring house prices to more affordable levels.
As the shares of housebuilders have been recovering from the Brexit fallout, we have been expressing our caution on the sector and, as a result of this and today’s update, we continue to recommend Berkeley as a ‘hold’. It should nonetheless be noted that shares in the sector will, for the time being, continue to return strong cash flows back to investors through dividends.
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